Interest-rate derivative products have appeared in Vietnam since 2015 as a financial instrument used to hedge and limit risks from interest-rates fluctuation in the underlying market. However, at present, the Vietnamese authority has only granted permission to 7 commercial banks, namely Lienvietpostbank, BIDV, ABbank, HDbank, Vietcombank, Techcombank and Viettinbank, which are eligible to provide interest-rate derivative products, which include: Forward rate agreement, Interest-rate swap, Cross-currency swap and Interest-rate option.
With the purpose of ensuring the supply of interest-rate derivative products safely, effectively and in compliance with regulations of law and strengthening the development of the derivatives market simultaneously, on September 7, 2021, The State Bank of Vietnam announced a Draft Circular to amend and supplement some articles of Circular No. 01/2015/TT-NHNN dated January 6, 2015, defining the trade and supply of interest-rate derivative products of commercial banks, branches of foreign banks (“Draft Circular“).
This article includes some new and prominent regulations of the State Bank of Vietnam on the trade and supply of interest-rate derivative products:
1. Foreign investors shall be allowed to invest in trading interest-rate derivative products
The Draft Circular supplements regulations on the subjects who are allowed to invest in trading interest-rate derivative products, i.e., “Foreign investors are organizations that own Government bonds issued in Viet Nam Dong in the domestic market.”. In fact, Cross-currency swap – a type of interest-rate derivative product – relies on foreign currencies. Therefore the amendment of such regulation is suitable for customers, including “non-resident organizations and individuals ” who are allowed to make foreign currency transactions in accordance with the provisions stated in Clause 2, Article 2 of Circular No.02/2021/TT-NHNN dated March 31, 2021, of the State Bank on guidelines for foreign currency transactions on foreign currency market by credit institution authorized to make foreign currency transactions.
2. New complied principles
The Draft Circular also includes some new principles that require commercial banks and branches of foreign banks to comply with when trading and providing interest-rate derivative products.
Specifically, in case a customer is a legal entity who does not have or does not have enough foreign currency to fulfil the payment obligation arising when performing the interest-rate derivative contract, the customer is allowed to buy foreign currency at the same commercial bank, branches of foreign banks that provide interest-rate derivative products, or buy foreign currency at credit institutions authorized to make foreign currency transactions in order to fulfil payment obligations arising when performing interest-rate derivative contracts. This provision is designed to overcome real problems since there have been similar cases in which commercial banks and branches of foreign banks do not have a legal basis to sell foreign currency, hedge and limit risks for neither their customer nor for their self or sell foreign currency to pay net losses incurred when performing interest-rate derivative contracts.
Commercial banks and branches of foreign banks are also allowed to negotiate with their customers on the net payment of interest-rate derivative contracts. And this provision aims to minimize credit risks, increase liquidity, and provide opportunities for more stable development of the interest-rate derivatives market since the interest-rate derivative transactions are usually medium and long-term transactions and thus contain more significant potential risks.
3. New regulations on interest-rate swap products between two currencies
In addition, the Draft Circular also amends new regulations for interest rate swap products between two currencies, which strictly prohibit transactions relating to the fluctuations of the gold price, goods banned from trading, exporting and importing according to relevant provisions of the law.
Besides, in case the customer receives foreign currency from the interests arising from interest-rate derivative transactions or receives foreign currency from the exchange of the nominal capital, these foreign currencies shall be used for payment of the obligations arising from the original transactions of the customer or the customer shall sell these foreign currencies to the same commercial banks or branches of foreign banks that are trading and providing such interest-rate derivative products. The purpose of this regulation is to clarify that a customer who is not allowed to trade foreign currency, when receiving foreign currencies as interests, shall only use those foreign currencies for the payment of the obligations arising from the original transactions or must sell to the bank in compliance with regulations and restrictions on domestic transactions made by foreign currencies.