Decision No. 62/2006/QD-NHNN dated December 29, 2006 of the State Bank promulgating the Regulation on execution of interest-rate swap transactions

DECISION

PROMULGATING THE REGULATION ON EXECUTION OF INTEREST-RATE SWAP TRANSACTIONS

THE STATE BANK GOVERNOR

Pursuant to the 1997 Law on the State Bank of Vietnam and the 2003 Law Amending and Supplementing a Number of Articles of the Law on the State Bank of Vietnam;

Pursuant to the 1997 Law on Credit Institutions and the 2004 Law Amending and Supplementing a Number of Articles of the Law on Credit Institutions;

Pursuant to the Government's Decree No. 52/2003/ND-CP of May 19, 2003, 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,

DECIDES:

Article 1.- To promulgate together with this Decision the Regulation on execution of interest-rate swap transactions.

Article 2.- This Decision takes effect fifteen days after its publication in "CONG BAO" and replaces the State Bank Governor's Decision No. 1133/2003/QD-NHNN of September 30, 2003, promulgating the Regulation on execution of interest-rate swap transactions.

Article 3.- 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 and general directors (directors) of commercial banks, joint-venture banks and banks with 100% foreign capital, general directors (directors) of foreign bank branches, chairmen of management boards and general directors (directors) of enterprises executing interest-rate swap transactions with banks shall implement this Decision.

REGULATION

ON EXECUTION OF INTEREST-RATE SWAP TRANSACTIONS
(Promulgated together with the State Bank Governor's Decision No. 62/2006/QD-NHNN of December 29, 2006)

Article 1.- Scope and subjects of application

This Regulation provides for the execution of interest-rate swap transactions between commercial banks, joint-venture banks, banks with 100% foreign capital and foreign banks' branches operating in Vietnam (below referred to as banks for short) and non-bank enterprises which are established and operate under Vietnamese law (below referred to as enterprises for short), between banks, and between banks and foreign-based credit institutions. Interest-rate swap transactions shall be executed in accordance with this Regulation and international practice that is not against Vietnamese law.

Article 2.- Purpose of interest rate swaps

Banks and enterprises shall execute interest-rate swap transactions to prevent and limit risks caused by market interest-rate fluctuations.

Article 3.- Interpretation of terms

A number of terms used in this Regulation are construed as follows:

1. Foreign-based credit institutions include commercial banks, financial companies, financial leasing companies, investment banks, development banks, and other financial-credit institutions which are established and operate under foreign laws or are established by international organizations and recognized under Vietnamese law (except for foreign bank branches operating in Vietnam).

2. Interest-rate swap transaction means the entry into a contract by parties whereby one party commits to pay the other an interest sum calculated at the committed swap interest rate on a certain principal in a certain period of time.

3. Principal of an interest-rate swap transaction means a sum of money which, as agreed by the parties in the interest-rate swap transaction, will serve as a basis for the calculation of the payable interest amount, the receivable interest amount and the net interest amount from the interest rate swap.

4. Net interest amount in each period of an interest-rate swap contract means the difference between the receivable interest amount and the payable interest amount in each payment period of that contract.

5. Term for payment of the net interest amount means a period of time within the validity duration of an interest-rate swap contract agreed upon by the parties, at the end of which the parties shall pay each other the net interest amount.

Article 4.- Interest-rate swap transactions allowed to be executed

1. Interest rate swap for single currency (Vietnam dong or a foreign currency).

2. Interest rate swap between two currencies or cross currency swap, whereby the parties may agree to exchange or not to exchange the principal at the beginning of a period but they must exchange the principal at the end of the period at the agreed exchange rate from the effective date of the contract.

3. Forward start swap, whereby the parties may agree on a future point of time from which the transaction starts to be effective for payment.

4. Daily range accrual, whereby the payable and receivable interest amounts shall be calculated at the agreed interest rates, enclosed with the conditions based on market exchange rate and interest rate fluctuations.

Article 5.- Conditions for execution of interest-rate swap transactions

1. A bank that executes interest-rate swap transactions to prevent interest rate risks for its clients must fully meet the following conditions:

a/ Having its own capital of VND 1,000 billion or an equivalent value or more.

b/ Ensuring capital safety ratios in business activities according to regulations of the State Bank of Vietnam.

c/ Having adopted procedures for executing interest-rate swap transactions, including risk prevention measures.

d/ Having a positive total net interest of interest-rate swap transactions; if this total is negative, it must not exceed 5% of the own capital of that bank.

e/ Obtaining the Vietnam State Bank's permission for foreign exchange operations, with regard to the execution of foreign-currency interest-rate swap transactions.

f/ Observing regulations on foreign exchange management related to the exchange of principal, with regard to the execution of cross currency swap transactions.

2. Enterprises and banks that execute interest-rate swap transactions to prevent interest rate risks for themselves must fully meet the following conditions:

a/ Having original transactions executed in accordance with Vietnamese law. Such an original transaction may be one of the following: deposit, issuance of or investment in valuable papers, capital borrowing, financial leasing, or purchase of goods on deferred payment.

b/ Having financial capability or taking guarantee measures as agreed by the two parties for the fulfillment of the obligation to pay the net interest amount to the bank.

Article 6.- Limits on the term and principal for an enterprise's interest rate swap

1. The term of an interest-rate swap contract shall be agreed by the parties but must not exceed the remaining term of the principal transaction contract.

2. The principal under interest-rate swap contracts of an enterprise must not exceed 30% of the own capital of the bank.

Article 7.- Swap interest rates

The parties shall agree and commit in the interest-rate swap contract the interest rates for execution of interest-rate swap transactions.

Article 8.- Determination of total net interest

A bank's total net interest of interest-rate swap transactions at a point of time is the total of net interest amounts of all interest-rate swap contracts which remain valid at that point of time.

The net interest amount of an interest-rate swap contract at a point of time is the total of the net interest amounts of each of the valid periods of the interest-rate swap contract, calculated at the agreed interest rates and based on the principal balance at that point of time.

Article 9.- Payment of net interest amount in each period

1. The parties shall pay each other the net interest in each period which arises from the signed interest-rate swap contract.

2. The term for payment of the net interest shall be agreed by the parties but must not exceed one year.

3. When the net interest is paid in a foreign currency, the parties shall abide by the provisions of law on foreign exchange management.

4. When the net interest is paid abroad, the parties shall abide by the provisions of law on the transfer of money abroad.

Article 10.- Interest-rate swap contract

Interest-rate swap transactions must be established through interest-rate swap contracts. Based on the model contract of the International Swaps and Derivatives Association (ISDA), the parties shall agree on the interest-rate swap contract in accordance with Article 1 of this Regulation. An interest-rate swap contract must comprise the following principal contents:

1. Names, addresses, telephone and fax numbers of representatives of the contractual parties.

2. Principal, interest rate, and schedule for payment of the principal and interest.

3. Validity term of the contract.

4. Interest rates agreed to serve as swap interest rates.

5. Period for payment of the net interest amount.

6. Method of calculation of the net interest amount in each period and mode of payment.

7. Level of the enterprise's collateral or deposit (if any) to secure payment of the net interest.

8. Rights and obligations of the contractual parties.

9. Cases of termination of the contract ahead of time.

10. Procedures for settlement of disputes, if any, and for liquidation of the contract.

Article 11.- Accounting and risk provision

1. Banks shall conduct accounting of interest-rate swap transactions and set up risk provisions according to the regulations of the State Bank of Vietnam.

2. Enterprises shall conduct accounting of interest-rate swap transactions and set up risk provisions according to the relevant provisions of law on enterprise accounting and finance.

Article 12.- Registration of and reporting on execution of interest-rate swap transactions

1. Banks that fully meet the conditions set in Clause 1, Article 5 of this Regulation shall, when executing interest-rate swap transactions for the first time, notify in writing the State Bank of Vietnam (the Monetary Policy Department) for registration of their execution of interest-rate swap transactions.

2. By the tenth day of every month at the latest, banks that have registered with the State Bank of Vietnam the execution of interest-rate swap transactions shall send the preceding month's reports, made according to a set form, to the State Bank of Vietnam (the Monetary Policy Department).

Article 13.- Organization of implementation

Based on the provisions of this Regulation and relevant legal documents as well as international practice, banks shall promulgate procedures for executing interest-rate swap transactions suitable to their conditions, characteristics and financial capability.