Circular No. 40/2016/TT-NHNN dated December 30, 2016 of the State Bank of Vietnam on regulating the provision of commodity price derivatives of commercial banks

CIRCULAR 
Regulating the provision of commodity price derivatives  
of commercial banks
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Pursuant to the Law on 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, 2010;

Pursuant to the Government s Decree No.156/2013/ND-CP dated November 11, 2013 regulating the functions, tasks, powers and organization 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 issues a Circular regulating the provision of derivative commodity prices of commercial banks.

Chapter I 
GENERAL PROVISIONS

Article 1. Scope of regulation

This Circular regulates for the provision of commodity price derivatives of commercial banks and branches of foreign banks to customers in order to prevent risks of commodity prices for them.

Article 2. Subjects of application

1. Commercial banks and branches of foreign bank (hereinafter referred to as commercial banks) entitled to provide commodity price derivatives according to Establishment and Operation Licenses of the commercial banks, Establishment Licenses of bank branches, or documents amending or supplementing Licenses issued by the State Bank of Vietnam, including regulations on the provision of commodity price derivatives as well as the basic business and provision of  foreign exchange services in domestic and international markets.

2. Customers using commodity price derivatives supplied by commercial banks (hereinafter referred to as customers), including economic organizations established and operating under the provisions of Vietnamese law provisions, except credit institutions.

3. Legal entities and individuals involved in the provision of commodity price derivatives of commercial banks according to the provisions of this Circular.

Article 3. Interpretation of terms

In this Circular, the terms below are construed as follows:

1. Commodity price derivatives are financial instruments provided by commercial banks for the purpose of preventing risks of commodity prices for customers.

2. The provision of commodity price derivatives means the implementation of one of the below forms by the commercial banks:

a) Commercial banks contract and carry out non-standard contracts on commodity price derivatives with customers in unconcentrated markets for the purpose of preventing risks of commodity prices for customers; commercial banks shall carry out reciprocal transactions with foreign partners to balance risks from non-standard contracts on commodity price derivatives that have been signed and carried out with customers;

b) Commercial banks contract and carry out contracts of receiving and executing purchase and sale orders of standard contracts on commodity price derivatives with customers.

3. Overseas commodities exchanges are markets focusing on buying and selling standard contracts on commodity price derivatives. Overseas commodities exchanges shall be established and run under foreign laws.

4. Unconcentrated markets are markets buying and selling commodity price derivatives not on the Commodities Exchanges.

5. Standard contracts on commodity price derivatives are contracts standardized, listed and purchased on the overseas Commodities Exchanges.

6. Contracts of receiving and executing purchase and sale orders of standard contracts on commodity price derivatives are written agreements that commercial banks receive and upload the purchase and sale orders of standard contracts on commodity price derivative of customers on overseas Commodities Exchanges  for the purpose of preventing commodity price risks for customers.

7. Non-standard contracts on commodity price derivatives are written agreements between commercial banks and customers on the provision of commodity price derivatives in unconcentrated markets.

8. Original transactions are legal written contracts on purchase and sale of commodities and at risk of commodity prices, including: Contracts on purchase and sale of domestic commodities, contracts on commodities export and contracts on commodities import.

9. Underlying commodities are commodities traded in original transactions serving as a basis for commercial banks to provide commodity price derivatives, including: Agricultural products; fuel; energy; metal, excluding gold and commodities prohibited from trading and being exported or imported in accordance with current law provisions.

10. Reciprocal transactions are transactions of commercial banks carried out with foreign partners for the purpose of balancing risks from the non-standard contracts on commodity price derivatives signed and carried out with customers.

11. Foreign partners are organizations entitled to conduct transactions on commodity price derivatives in accordance with foreign laws or entitled to receive and upload purchase and sale orders of standard contracts on commodity price derivatives on the overseas Commodities Exchanges.

12. Purchase and sale orders of standard contracts on commodity price derivatives are orders of customers for the purchase and sale of standard contracts on commodity price derivatives via overseas Commodities Exchanges.

13. Transaction terms are periods of time starting from the date when orders of customers for the purchase and sale of standard contracts on commodity price derivatives are carried out until the date when orders of customers for the purchase and sale of standard contracts on commodity price derivatives are fully settled on the overseas Commodities Exchanges.

14. Escrow accounts are payment accounts in VND opened by customers at commercial banks to implement and ensure the implementation of arising financial obligations in non-standard contracts on commodity price derivatives, contracts on receiving and executing sale and purchase orders of standard contracts on commodity price derivatives.

15. Nominal volume of underlying commodities is the volume that the parties of non-standard contracts on commodity price derivatives or contracts on receiving and executing sale and purchase orders of standard contracts on commodity price derivatives take as a basis for calculating the receivable or payable amount or the possible fees. The nominal volume of underlying commodities is equal to or smaller than the remaining volume of underlying commodities in original transactions.

16. Market price is the price of underlying commodities traded on overseas Commodities Exchanges or provided by a third party at a specific time or in a defined term.

17. Reference price is the price that changes according to market price movements and is unanimously determined by parties of non-standard contracts on commodity price derivatives at specific points within the valid term of the contracts

18. Fixed price is the price as agreed by the parties of the commodities price swap contract to determine the price difference and payment obligations when the contracts are signed.

19. Executed price is the price used to compare the reference price of the underlying commodities for the buyers of rights to consider and choose to optionally purchase and sell commodities prices.

Article 4. Principles of providing commodity price derivatives

1. The provision of commodity price derivatives shall be implemented as agreed between commercial banks and customers in accordance with this Circular and relevant law provisions. The agreed contents on the provision of commodity price derivatives of commercial banks to customers shall be made in writing.

2. Commercial banks shall be entitled to provide commodity price derivatives when they have issued internal regulations on the provision of commodity price derivatives in accordance with the provisions of this Circular and relevant law provisions.

3. Commercial banks shall be entitled to quote, price and record prices in non-standard contracts on commodity price derivatives or contracts on receipt and execution of sale and purchase orders of non-standard contracts on commodities price derivatives in foreign currencies for the original transactions in foreign currencies. For the original transactions in VND, commercial banks shall quote, price and records prices in non-standard contracts on commodity price derivatives or contracts on receipt and execution of sale and purchase orders of non-standard contracts on commodities price derivatives in VND; In case it is necessary to convert from foreign currencies into VND, the exchange rate shall be agreed upon by the parties in accordance with the regulations of the State Bank of Vietnam.

4. Commercial banks shall only pay customers in VND for the arising obligations as agreed in non-standard contracts on commodity price derivatives or contracts on receipt and execution of sale and purchase orders of non-standard contracts on commodities price derivatives; shall not deliver and receive commodities from foreign customers and partners. In case it is necessary to convert from foreign currencies into VND, the exchange rate shall be agreed upon by the parties in accordance with the regulations of the State Bank of Vietnam.

5. Credit institutions and branches of foreign banks shall not grant credits to customers for initial escrows or additional parts on escrow accounts opened at commercial banks providing commodity price derivatives or for payment of arising obligations as agreed in the contracts on receipt and execution of sale and purchase orders of non-standard contracts on commodities price derivatives.

Article 5. Conditions for customers using commodity price derivatives

Commercial banks shall consider providing commodity price derivatives when customers have the following conditions:

1. Having valid original transactions.

2. Using commodity price derivatives to prevent the risks of commodity prices on the original transactions of customers.

3. Being financially capable as evaluated by commercial banks to ensure the fulfillment of arising payment obligations related to the use of commodity price derivatives.

Article 6. Application dossiers for using commodity price derivatives.

In need of using commodity price derivatives, customers shall send dossiers to commercial banks, each of which include:

1. Authenticated copy or copy attached with the original transaction. If the customers submit copies attached with the original transactions, the commercial banks shall confirm the accuracy of the copies compared to the originals.

2. Other documents as instructed by commercial banks.

Article 7. Internal regulations

Commercial banks shall issue documents providing internal regulations on the provision of commodity price derivatives in accordance with this Circular and relevant law provisions and policies of commercial banks. Such documents shall specifically provide the following contents:

1. Process of dealing with customers using commodity price derivatives for the purpose of preventing the risks of commodity prices for their original transactions.

2. Assessment of the financial ability of customers to ensure the fulfillment of arising payment obligations related to the use of commodity price derivatives.

3. Conditions for foreign partners to which commercial banks sign and carry out non-standard contracts on commodity price derivatives in accordance with the provisions of Clause 2, Article 11 of this Circular.

4. Decentralization of authority, functions, duties and responsibilities of individuals and units in the consultation, approval, decision to provide commodity price derivatives.

5. Identification and measurement of risks that may arise when providing commodity price derivatives; formulation of processes and assignment of responsibilities for monitoring, controlling and evaluating arising risks; measures to prevent and deal with risks, including limits for providing commodity price derivatives  of commercial banks, restrictions on the provision of commodity price derivatives  for a single customer and for individuals and departments that are approved to be provided with commodity price derivatives .

6. Cases of changes related to contracts on receipt and execution of purchase and sale orders of non-standard contracts on commodity price derivatives or non-standard contracts on commodity price derivatives due to changes in original transactions; Remedial measures for these cases.

7. Guidance, inspection, control, internal audit for the provision of commodity price derivatives.

8. Application dossiers for using commodity price derivatives in accordance with Article 6 of the Circular.

9. Other contents required by commercial banks for the internal management purpose to ensure the safe and effective provision of commodity price derivatives.

Article 8. Accounting

Commercial banks shall perform accounting for the provision of commodity price derivatives according to the Vietnam’s standards on Accounting and regulations of the State Bank of Vietnam on the system of accounting accounts of credit institutions and branches of foreign banks.

Chapter II 
SPECIFIC PROVISIONS 

Section 1 
ROVISION OF COMMODITY PRICE DERIVATIVES FOR 
CUSTOMERS IN UNCONCENTRATED MARKETS

Article 9. Scope of the provision of commodity price derivatives to customers in unconcentrated markets

1. Commercial banks shall be entitled to sign and carry out non-standard contracts on commodity price derivatives with customers in unconcentrated markets, including:

a) Commodity price swap contracts, which are non-standard contracts on commodity price derivatives, in which commercial banks and customers agree to buy and sell the same type of underlying commodities at the same time, while the nominal volume of the underlying commodities and terms of such reciprocal contracts are still valid Accordingly, one party will buy at the fixed price and sell at the reference price while the other party will sell at the fixed price and buy at the reference price at the time during the valid terms of the contracts; payments between commercial banks and customers shall be made based on the differences between the fixed and reference prices and the nominal volumes of underlying commodities;

b) Non-standard contracts on the rights to optionally purchase commodity prices are non-standard contracts on commodity price derivatives, in which commercial banks shall sell to customers the rights (not the obligations), to purchase a nominal volume of underlying commodities at a price made in the valid term of non-standard contracts on the rights to optionally purchase commodity prices. During the valid terms, when the reference price of the underlying commodities is higher than the executed price, commercial banks shall, at their requests, pay the customers the amount calculated based on the difference between the executed price and the reference price of the underlying commodities and the nominal volume of the underlying commodities; When the reference price of the underlying commodities is lower than the executed price, the commercial banks and the customers make no payment on the difference between the executed price and the reference price of the underlying commodities. Customers shall pay fees to commercial banks as agreed in the non-standard contracts when purchasing commodities prices; Such fees shall be paid in one or more installments during the valid term of the non-standard contracts as agreed;

c) Non-standard contracts on the rights to optionally sell commodity prices are non-standard contracts on commodity price derivatives, in which commercial banks shall sell to customers the rights (not the obligations) to sell a nominal volume of underlying commodities at a price made in the valid term of non-standard contracts on the rights to optionally sell commodity prices. During the valid terms, when the reference price of the underlying commodities is lower than the executed price, commercial banks shall, at their requests, pay the customers the amount calculated based on the difference between the executed price and the reference price of the underlying commodities and the nominal volume of the underlying commodities; When the reference price of the underlying commodities is higher than the executed price, the commercial banks and the customers make no payment on the difference between the executed price and the reference price of the underlying commodities. Customers shall pay fees to commercial banks as agreed in the non-standard contracts when selling commodities prices; Such fees shall be paid in one or more installments during the valid term of the non-standard contracts as agreed;

d) Non-standard contracts on the rights to optionally choose commodity prices with price ceiling/floor are non-standard contracts on commodity price derivatives, in which commercial banks shall sell to customers the rights (not the obligations), to purchase (or sell) a nominal volume of commodities at a executed price with a price ceiling (price floor), and at the same time purchase from the customers the rights (not the obligations) to sell (or purchase) the same nominal volume of underlying commodities at a executed price with a price floor (price ceiling) made in the valid term of non-standard contracts on the rights to optionally choose commodity prices with price ceiling/floor. During the valid terms, when the reference price of the underlying commodities is higher than the executed price with price ceiling (or lower than the executed price with price floor), commercial banks shall, at their requests, pay the customers the amount calculated based on the difference between the executed price with price ceiling (or lower than the executed price with price floor) and the reference price of the underlying commodities and the nominal volume of the underlying commodities; When the reference price of the underlying commodities is lower than the executed price with price ceiling and higher than the executed price with price floor, the commercial banks and the customers make no payment on the difference between the executed price and the reference price of the underlying commodities. The commercial banks and the customers shall make agreements in the non-standard contracts on the rights to optionally choose commodity prices with price ceiling/floor on the payable fees;

2. The valid terms of non-standard contracts on commodity price derivatives shall not exceed the valid terms of original transactions.

Article 10. Non-standard contracts on commodity price derivative

1. The commercial banks shall reach agreement with customers on the provision of commodity price derivatives at the non-standard contracts in accordance with the provisions of this Circular and relevant law provisions. The non-standard contracts on commodity price derivatives shall have at least the following contents:

a) Name of the address of the commercial banks; name and address of the customers;

b) Original transaction; type of underlying commodities; volume of underlying commodities; prices of underlying commodities applied in original transactions; valid terms of original transactions; payments of the original transactions;

c) Prices to implement commodity price derivatives;

d) Transaction term of the contracts;

e) Date of periodic payment and payment methods;

f) Payments;

g) Validity of the contracts;

h) Rights and responsibilities of the parties;

i) Cases of changes and premature termination of contracts, agreements on handling violations.

2. In addition to the contents prescribed in Clause 1 of this Article, non-standard contracts of commodity price derivatives shall have other contents as agreed by the parties in accordance with provisions of this Circular and relevant law provisions.

3. Commercial banks and customers shall agree to apply the Contract Templates of the International Exchanges and Derivatives Association provided that the contents of the non-standard contracts on commodity price derivatives are not contrary to provisions in this Circular and relevant law provisions.

4. Non-standard contracts on commodity price derivatives shall be established under the form of contract templates and/or specific contracts.

Article 11. Reciprocal transactions

1. Commercial banks shall conduct reciprocal transactions with foreign partners to balance risks from non-standard contracts on commodity price derivatives signed and carried out with customers as follows:

a) Commercial banks shall be entitled to make reciprocal transactions as prescribed at Points a, b, c and d, Clause 1, Article 9 and Points a, b and c, Clause 1, Article 13 of this Circular;

b) Commodities in reciprocal transactions are underlying commodities;

c) Nominal volume of underlying commodities and the validity of reciprocal transactions shall match with the nominal volume of underlying commodities and the validity of non-standard contracts on commodity price derivatives signed and carried out by commercial banks with customers;

d) In case of changes in non-standard contracts on commodity price derivatives due to changes in original transactions, commercial banks shall adjust the transactions with foreign partners according to provisions at Points a, b and c of this Clause and the internal provisions in Clause 6, Article 7 of this Circular;

e) In case of premature termination of reciprocal transactions between commercial banks and foreign partners, the commercial banks shall carry out other reciprocal transactions with the same valid term and nominal volume of underlying commodities as the remaining nominal volume of commodities in the non-standard contracts on commodity price derivatives that commercial banks have signed and carried out with customers; In case the commercial banks cannot carry out other reciprocal transactions for the remaining valid term and nominal volume of commodities in the non-standard contracts on commodity price derivatives that commercial banks have signed and carried out with customers, within 10 (ten) working days from the date of termination of the reciprocal transactions, the commercial banks shall develop plans to balance risks from the non-standard contracts on commodity price derivatives that commercial banks have signed and carried out with customers and report the causes, remedial measures and deadlines to the State Bank of Vietnam (Monetary Policy Department and Banking Inspection and Supervision Department).

2. In case of premature termination of non-standard contracts on commodity price derivatives between commercial banks and customers, the commercial banks shall terminate the reciprocal transactions with the foreign partners. When carrying out reciprocal transactions with foreign partners, the commercial banks shall comply with not only the provisions of Clause 1 of this Article, but the foreign partners shall be rated at least Baa/P-3 by Moody s Investors Service or BBB-/A-3 by Standard&Poor s or BBB-/F3 by Fitch Ratings at the time of signing non-standard contracts on commodity price derivative, except for the case in which branches of foreign banks make reciprocal transactions with their parent banks or the overseas branches of the parent banks.

Article 12. Ensuring measures

Commercial banks and customers shall agree on the application or non-application of measures to ensure the implementation of obligations as agreed in non-standard contracts on commodity price derivatives according to law provisions on secured transactions and relevant law provisions.

Section 2 
PROVIDING COMMODITY PRICE DERIVATIVES FOR CUSTOMERS VIA OVERSEAS COMMODITIES EXCHANGES

Article 13. Scope of the provision of commodity price derivatives for customers via overseas Commodities Exchanges

1. Commercial banks shall be entitled to receive and upload orders from customers on the purchase and sale of standard contracts on commodity price derivatives on overseas Commodities Exchanges, including:

a)  Contracts on future commodity prices;

b) Standard contracts on rights to optionally purchase commodity prices;

c) Standard contracts on rights to optionally sell commodity prices.

2. Commercial banks shallbeonly entitled to receive and upload orders from customers on the purchase and sale of standard contracts on commodity price derivatives on overseas Commodities Exchanges when the transaction terms of such contracts do not exceed the valid term of original transactions.

Article 14. Contracts on receiving and executing orders to buy and sell standard contracts on commodity price derivatives

1. Commercial banks shall make agreement with customers on receiving and executing the purchase and sale orders of standard contracts on commodity price derivatives via overseas Commodities Exchanges in accordance with the provisions of this Circular and relevant law provisions. The contracts on receiving and executing orders to purchase and sale orders of standard contracts on commodity price derivatives shall have at least the following contents:

a) Name and address of the commercial bank; name and address of the customers;

b) Contents of receiving and giving orders of customers on the purchase and sale of standard contracts on commodity price derivatives on overseas Commodities Exchanges; order confirmation and announcements of customers;

c) Limits of receipt and execution of orders for sale and purchase of standard contracts on commodity price derivatives;

d) Escrows;

e) Fees and payments;

f) Rights and responsibilities of the parties;

g) Cases of changes and premature termination of contracts;

h) Handling of disputes and liquidation of contracts.

2. In addition to the contents prescribed in paragraph 1 of this Article, contracts on receiving and executing orders to purchase and sale orders of standard contracts on commodity price derivatives shall have other contents as agreed by the parties according to provisions of this Circular and relevant law provisions.

3. contracts on receiving and executing orders to purchase and sale orders of standard contracts on commodity price derivatives shall be in the form of contract templates and/or specific contracts.

Article 15. Escrows for sale and purchase of standard contracts on commodity price derivatives

1. Commercial banks shall take agree on the escrow norms for customers in accordance with provisions of overseas Commodities Exchanges or requirements of foreign partners and the financial capability of customers to ensure the fulfillment of arising obligations as agreed in contracts on receiving and executing orders to purchase and sale orders of standard contracts on commodity price derivatives.

2. Customers shall open and maintain the minimum balance on escrow accounts before and during the use of commodity price derivatives via overseas Commodities Exchanges. In case the customers fail to maintain the minimum balance on such accounts as agreed with commercial banks, the commercial banks shall have the right to wholly or partly settle the purchase orders of the customers.

Chapter III 
RIGHTS AND RESPONSIBILITIES OF ORGANIZATIONS AND INDIVIDUALS RELATED TO THE PROVISION OF COMMODITY PRICE DERIVATIVES

Article 16. Rights and responsibilities of commercial banks

1. Commercial banks shall have rights to:

a) Request customers to provide information and documents proving the satisfaction of conditions for customers using commodity price derivatives according to the provisions of Article 5 of this Circular; other arising information and documents related to the provision of commodity price derivatives in accordance with this Circular.

b) Request the customer to notify any changes in original transactions to the commercial bank to consider and deal with issues related to the provision of commodity price derivatives;

c) Other rights as agreed by commercial banks and customers in accordance with this Circular and relevant law provisions.

2. Commercial banks shall take responsibilities for:

a) Performing risk management and control in providing commodity price derivatives at the head offices of commercial banks. Branches of foreign banks providing commodity price derivatives shall manage and control risks in accordance with the provisions of the parent bank, in accordance with the provisions of this Circular;

b) Providing accurate information to customers about commodity price derivatives, possible risks, fees and charges (if any) for customers to comprehend and consider the use of commodity price derivatives and take risk preventive measures;

c) Studying foreign law provisions and international market developments related to commodity price derivatives as well as information on assessing credit ratings of foreign partners in order to ensure the safe and effective provision of commodity price derivatives;

d) Other responsibilities as agreed by commercial banks and customers in accordance with this Circular and relevant law provisions.

Article 17. Rights and responsibilities of customers using commodity price derivatives

1. Customers shall have rights to:

a) Request commercial banks to provide accurate information about commodity price derivatives, possible risks, types of fees and charges (if any) so that customers can comprehend and consider the use of such commodity price derivatives and take risk preventive measures;

b) Other rights as agreed by customers and commercial banks in accordance with this Circular and relevant law provisions.

2. Customers shall take responsibilities for:

a) Providing information and documents proving the satisfaction of conditions prescribed in Article 5 of this Circular; Taking legal accountability for the accuracy and truthfulness of the information and documents given to commercial banks;

b) Promptly notifying any changes in original transactions to the commercial banks to consider and adjust the contracts on receiving and executing purchase and sale orders of standard contracts on commodity price derivatives, non-standard contracts on commodity price derivatives and reciprocal transactions;

c) Other responsibilities as agreed by commercial banks and customers in accordance with this Circular and relevant law provisions.

Chapter IV 
PROVISIONS OF IMPLEMENTATION

Article 18. Effect

1. This Circular takes effect from March 4, 2017.

2. For contracts on provision of commodity price derivatives which have been signed before the effective date of this Circular, commercial banks shall continue to carry out the contracts in conformity with valid law provisions at the time of signing the contracts or agreements on amending or supplementing  contracts according to the regulations of this Circular.

3. In case commercial banks are approved by the State Bank of Vietnam to pilot commodity price derivatives, the commercial banks shall continue to carry out the pilot contents until the end of the pilot period approved by the State Bank of Vietnam. For contracts on provision of commodity price derivatives signed after the effective date of this Circular, the signing and implementation of such contracts shall comply with provisions of this Circular.

Article 19. Organization of implementation

Chief of the Governor’s Office, Director of Monetary Policy Department, heads of units under the State Bank of Vietnam, managers of branches of the State Bank in provinces and municipalities, Chairpersons of the Management Boards, Chairpersons of Member Councils and General Directors (Directors) of commercial banks shall take responsibilities for organizing the implementation of this Circular.