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Customer-driven Commodity Risk Management Business in Conjunction with Commodity Financing
 

I. Description
Customer-driven commodity risk management business means the customer-driven fund business in which ICBC conduct transaction with the customer in the mode of inquiry through financial instruments (such as commodity forward, swap and option) and transaction elements of commodities (such as precious metals, energy, base metals, mineral products, agricultural products and soft commodities) should be specified.
Commodity financing means a short-term structured financing business in which ICBC entrusts a third party to supervise the reserves and stocks legally held by the borrower or commodity receivable and commodity value is taken as the first repayment guarantee.
Customer-driven commodity risk management business in conjunction with commodity financing means to avert forward the risk of commodity price fall, the customer conducts customer-driven commodity risk management business under commodity financing at ICBC while applying for commodity financing. Specific business type includes forward, swap and option.

II. Target Customers
The product is applicable to corporate customers (including bulk commodity production, processing, trade and end consumption enterprises) with certain understanding of the international bulk commodity market and the demand for commodity financing and managing bulk commodity price risk.

III. Features and Advantages
1. According to relevant regulations of ICBC, when a customer applies for commodity financing for the purpose of operation, if it hasn’t conducted hedging transaction with ICBC, the financing proportion shall not exceed 70% of verified value of pledged commodity. If the hedging transaction has been conducted, such proportion can be properly raised but shall be no more than 90% of the verified value.
2. Cash difference delivery doesn’t involve physical delivery. At maturity, both parties conduct difference delivery according to agreed fixed price and commodity price index on the pricing day, without physical delivery.
3. It is a relatively high-standardization off-exchange trading product. At an early stage, both parties don’t need to pay fees. The trading structure can be customized.
4. Various underlying commodities are available, including 40 commodities (such as precious metals, energy, base metals, mineral products, agricultural products and soft commodities) in five categories.

IV. Business Case
As the commodity financing enterprises, Enterprise E signed the commodity financing contract on 1,000 ton refined copper on February 8, 2018. Assuming that, the spot market price is RMB52,680/ton. If the customer didn’t hedge pledged copper, it will obtain the loan as per 70% of goods value: 52,680 * 1,000x0.7=RMB36,876,000. If hedged, it can obtain the loan as per 90% of the value: 52,680x1,000 * 0.9=RMB47,412,000. The customer agreed to repay the loan to ICBC on May 13, 2018.
If the copper price will decline to RMB35,000/ton on May 13, 2018, the pledged commodity will be valuated at RMB35 million only without hedging, which cannot ensure normal repayment. If hedged, the pledged commodity value and forward contract price will remain RMB52.68 million, enough to repay the loan.

V. Qualification
In addition to ICBC’s conditions on commodity financing, the customer shall also meet the following conditions to apply for customer-driven commodity risk management business:
1. It has opened a basic or general deposit account at ICBC.
2. It has no bad credit records at banks or major bad records.
3. Its credit rating is above A (inclusive).
4. Special credit limit has been approval for derivative transaction.
If the customer has provided security deposit in full or other low-risk guarantee, it is not subject to Items 3 and 4.

VI. Application Process
1. Signing of a master agreement: The customer applying for customer-driven commodity risk management business must sign the Customer-driven Risk Management Business Agreement of ICBC with ICBC.
2. Customer assessment: The customer needs to receive comprehensive assessment in terms of its operation nature, experience in financial derivative transaction and internal management & control and fill out the Customer Assessment Form.
3. Application submission and risk confirmation: The customer my submit applications one by one based on business requirements, and sign the Financial Derivative Business Confirmation of ICBC for Corporate Customers with ICBC one by one.
4. Implementation of guarantee measures: The customer may pay security deposit, hand over collateral or may occupy special credit limit of derivative transaction. During transaction duration, ICBC will conduct dynamic management of security deposit based on market capitalization of derivative transaction.
5. Transaction conclusion: ICBC will submit a transaction confirmation to the customer.
6. Delivery upon maturity: At maturity, ICBC will conduct fund clearing and accounting for the customer.

VII. Transaction Variety and Price Reference Object
Table Summary of Transaction Variety and Price Reference Object

Variety

Price reference object

Precious metals

Gold (off-exchange)

London spot gold

Silver (off-exchange)

London spot silver

Platinum (off-exchange)

Zurich spot platinum

Palladium (off-exchange)

Zurich spot palladium

Gold (futures)

COMEX GC futures contract

Silver (futures)

COMEX SI futures contract

Platinum (futures)

NYMEX PL futures contract

Palladium (futures)

NYMEX PA futures contract

Base metals and minerals

Copper

LME CA futures contract

Aluminum

LME AH futures contract

Zinc

LME ZS futures contract

Lead

LME PB futures contract

Nickel

LME NI futures contract

Tin

LME SN futures contract

Iron ore

Off-exchange TSI62% index

Energies

Crude oil

ICE BRENT futures contract

NYMEX WTI futures contract

PLATTS Dated Brent price index

PLATTS Dubai crude oil price index

Natural gas

NYMEX natural gas futures contract

Fuel oil

PLATTS FO 180 CST index

PLATTS FO 380 CST index

Jet fuel

PLATTS JET FUEL index

Diesel oil

PLATTS GASOIL.001% (10PPM) index

PLATTS GASOIL.005% (50PPM) index

PLATTS GASOIL.05% (500PPM) index

Naphtha

PLATTS JNAPH index

Coal

API8 issued by ARGUS (CIF,South China Port, China)

NEWC (FOB,Port of Newcastle, Australia)published by GLOBALCOAL

Paraxylene

PLATTS PX price index

Agricultural produces

Soybean

CBOT ZS futures contracts

Soybean meal

CBOT ZM futures contract

Soybean oil

CBOT ZL futures contract

Wheat

CBOT ZW futures contract

Corn

CBOT ZC futures contract

Beef cattle

CME GF futures contract

Live cattle

CME LE futures contract

Lean meat

CME HE futures contract

Skim milk powder

CME GNF futures contract

Soft commodities

Sugar

ICE SB futures contract

Cotton

ICE CT futures contract

Coffee

ICE KC futures contract

Coco

ICE CC futures contract

Rubber

SGX TSR20 futures contract

SGX RSS3 futures contract

Palm oil

MDX FCPO futures contract

Orange juice

ICE OJ futures contract

The specific varieties are subject to products actually launched by ICBC.

VIII. Risk Prompt
As affected by political and economic factors at home and abroad and accidents, the international commodity market price may undergo drastic fluctuations. After transaction conclusion, the risks and losses arising therefrom shall all be assumed by the customer, and ICBC won’t bear any responsibility.

IX. Definitions
Hedging is also known as "hedging transaction". Basic practice: buy or sell the commodity transaction contract in the same quantity as but with the direction opposite to spot market transaction in the financial market so that the profit/loss from spot commodity price change in the coming period can be compensated or offset by the commodity transaction contract, thereby averting uncertainty risk of price change to enterprises.
Fixed price: buying/selling prices set forth in the contract.
Floating price: official settlement price for the object set forth in the contract.
The official settlement price of forward base metal transaction refers to the second round of closing price at the open outcry of LME in the morning. It is the basis for determining spot metal price and three-month forward price and for calculating monthly average price.

Note: The information provided on this page is for reference only. Concrete business shall be subject to the announcements and provisions of the local outlet.


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