Circular No. 40/2016/TT-NHNN on the provision of commodity price derivative products by commercial banks

CIRCULAR
Regulations on the provision of commodity price derivative products by commercial banks

Pursuant to the Law on the State Bank of Vietnam No. 46/2010/QH12 dated June 16, 2010;

No. 06/2013/UBTVQH13 dated March 18, 2013;

Pursuant to Decree No. 156/2013/NĐ-CP dated November 11, 2013, of the Government stipulating the functions, tasks, powers, and organizational structure of the State Bank of Vietnam;

Article 1.

The Governor of the State Bank of Vietnam issues this Circular to regulate the provision of commodity price derivative products by commercial banks.

PART I
GENERAL PROVISIONS

Article 1. Scope of Regulation

This Circular regulates the provision of commodity price derivative products by commercial banks and foreign bank branches for customers with the purpose of mitigating commodity price risks for customers.

Article 2. Applicability

1. Commercial banks and foreign bank branches (hereinafter referred to as commercial banks) may provide commodity price derivative products according to the Banking Business License for commercial banks, Branch Establishment License for foreign banks, or amendments and supplements to these licenses issued by the State Bank of Vietnam, which include provisions on providing commodity price derivative products and basic foreign exchange trading and service activities in domestic and international markets.

2. Customers using commodity price derivative products provided by commercial banks (hereinafter referred to as customers) are economic organizations established and operating under Vietnamese law, except credit institutions.

3. Legal entities and individuals related to the provision of commodity price derivative products by commercial banks as stipulated in this Circular.

Article 3. Explanation of Terms

In this Circular, the following terms are understood as follows:

1. Commodity price derivative products are financial instruments provided by commercial banks aimed at mitigating commodity price risks for customers.

2. Provision of commodity price derivative products involves commercial banks implementing one of the following forms:

a) Commercial banks enter into and perform non-standard commodity price derivative contracts with customers in the over-the-counter market for the purpose of mitigating commodity price risks for customers; commercial banks must conduct corresponding transactions with foreign counterparties to balance risks from non-standard commodity price derivative contracts entered into and performed with customers;

b) Commercial banks enter into and perform contracts to accept and execute orders to buy and sell standardized commodity price derivative contracts with customers.

3. Foreign commodity exchange is a centralized market for buying and selling standardized commodity price derivative contracts. The foreign commodity exchange is established and operates under foreign laws.

4. Over-the-counter market is a market for buying and selling commodity price derivative products that are not traded on the foreign commodity exchange.

5. Standardized commodity price derivative contract is a contract that is standardized, listed, and traded on the foreign commodity exchange.

6. Contract to accept and execute orders to buy and sell standardized commodity price derivative contracts is a written agreement whereby the commercial bank receives and executes customer orders to buy and sell standardized commodity price derivative contracts on the foreign commodity exchange for the purpose of mitigating commodity price risks for customers.

7. Non-standard commodity price derivative contract is a written agreement between the commercial bank and the customer regarding the provision of commodity price derivative products in the over-the-counter market.

8. Underlying transaction is a written goods purchase and sale contract that is legal and subject to price risk, including: Domestic goods purchase and sale contracts, export goods purchase and sale contracts, import goods purchase and sale contracts.

9. Underlying goods are goods traded in underlying transactions serving as the basis for commercial banks to provide commodity price derivative products, including: Agricultural products; fuels; energy; metals, excluding underlying goods being gold and other goods prohibited from trading and exporting/importing under current laws.

10. Corresponding transaction is a transaction conducted by the commercial bank with a foreign counterparty to balance risks from non-standard commodity price derivative contracts entered into and performed with customers.

11. Foreign counterparty is an organization permitted to engage in derivative commodity price transactions under foreign laws or permitted to receive and execute orders to buy and sell standardized commodity price derivative contracts on the foreign commodity exchange.

12. Order to buy and sell standardized commodity price derivative contracts is a customer's request to buy and sell standardized commodity price derivative contracts through the foreign commodity exchange.

13. Transaction period is the time from when the customer's order to buy and sell standardized commodity price derivative contracts is executed until the order is fully settled on the foreign commodity exchange.

14. Margin account is a Vietnamese dong settlement account opened by the customer at the commercial bank to fulfill and guarantee fulfillment of financial obligations arising from non-standard commodity price derivative contracts and contracts to accept and execute orders to buy and sell standardized commodity price derivative contracts.

15. Notional quantity of underlying goods is the quantity upon which the amount received or paid or fee (if any) is based; the notional quantity of underlying goods is equal to or less than the remaining quantity of underlying goods in the underlying transaction.

16. Market price is the price of underlying goods traded on the foreign commodity exchange or provided by a third party at a specific point in time or within a defined period.

17. Reference price is a price that changes according to market price trends and is agreed upon by the parties to non-standard commodity price derivative contracts at a specific point during the contract term.

18. Fixed price level is the price agreed upon by the parties to the commodity price swap contract for determining the price difference and payment obligation at the time of settlement of the contract.

19. Execution price level is the price used to compare with the reference price of the underlying commodity for the buyer of the option to decide on exercising the option to buy or sell the commodity price.

Article 4. Principles for supplying derivative commodity price products

1. The supply of derivative commodity price products shall be carried out according to the agreement between commercial banks and customers, in compliance with this Circular and relevant laws. The contents of the agreement regarding the supply of derivative commodity price products by commercial banks to customers must be documented in writing.

2. Commercial banks may supply derivative commodity price products when they have issued internal regulations on the supply of derivative commodity price products in compliance with this Circular and relevant laws.

3. Commercial banks may quote, value, and record prices in non-standard derivative commodity price contracts, and contracts for receiving and executing orders to buy or sell standardized derivative commodity price contracts denominated in foreign currency for transactions that are foreign currency purchase and sale contracts. For transactions that are domestic currency purchase and sale contracts, commercial banks may quote, value, and record prices in non-standard derivative commodity price contracts, and contracts for receiving and executing orders to buy or sell standardized derivative commodity price contracts denominated in Vietnamese dong; where conversion from foreign currency to Vietnamese dong is required, the exchange rate between Vietnamese dong and foreign currency shall be agreed upon by the parties in compliance with the regulations of the State Bank of Vietnam.

4. Commercial banks may only settle in Vietnamese dong for customers' obligations arising from non-standard derivative commodity price contracts, and contracts for receiving and executing orders to buy or sell standardized derivative commodity price contracts; they shall not deliver goods or accept goods from customers and foreign counterparties. Where conversion from foreign currency to Vietnamese dong is required, the exchange rate between Vietnamese dong and foreign currency shall be agreed upon by the parties in compliance with the regulations of the State Bank of Vietnam.

5. Credit institutions and branches of foreign banks shall not provide credit to customers for initial margin deposits or to supplement insufficient margin balances on accounts opened at commercial banks supplying derivative commodity price products, nor for settling obligations arising from contracts for receiving and executing orders to buy or sell standardized derivative commodity price contracts.

Article 5. Conditions for Customers Using Derivative Commodity Price Products

Commercial banks shall consider supplying derivative commodity price products to customers who meet the following conditions:

1. Having an underlying transaction still in effect.

2. The purpose of using derivative commodity price products is to hedge against commodity price risks associated with the underlying transaction of the customer.

3. Possessing financial capability, as assessed by the commercial bank, to ensure fulfillment of payment obligations arising from the use of derivative commodity price products.

Article 6. Documents for Requesting to Use Commodity Price Derivative Products

When there is a need to use commodity price derivative products, customers must submit to commercial banks the following documents:

1. A certified copy or a copy accompanied by the original transaction document for verification. In cases where customers submit a copy accompanied by the original for verification, commercial banks have the responsibility to confirm the accuracy of the copy compared to the original.

2. Other documents as guided by commercial banks.

Article 7. Internal regulations

Commercial banks shall issue internal regulations governing the provision of commodity price derivative products in accordance with this Circular, relevant legal provisions, and the bank's policy on providing commodity price derivative products. The internal regulations of commercial banks must provide detailed guidance on the following contents:

1. Procedures for conducting transactions with customers using commodity price derivative products aimed at mitigating commodity price risks associated with their original transactions.

2. Evaluation of the customer’s financial capacity to ensure fulfillment of payment obligations arising from the use of commodity price derivative products.

3. Conditions for foreign counterparties with whom commercial banks enter into and execute non-standard commodity price derivative contracts in compliance with Clause 2, Article 11 of this Circular.

4. Hierarchical levels, delegations, functions, tasks, and responsibilities of individuals and departments in assessing, approving, and deciding on the provision of commodity price derivative products.

5. Identification, measurement of potential risks that may arise when providing commodity price derivative products; establishment of procedures and assignment of responsibilities for monitoring, controlling, and evaluating emerging risks; preventive and risk management measures, including supply limits of commodity price derivative products by commercial banks, supply limits for individual customers, and supply limits for individuals and departments authorized to approve and decide on the provision of commodity price derivative products.

6. Circumstances involving changes in content related to standard commodity price derivative contract receipt and execution orders, non-standard commodity price derivative contract orders due to changes in the original transaction; handling measures for corresponding transactions in these circumstances.

7. Guidance, inspection, control, and internal audit of the provision of commodity price derivative products.

8. Documents for requesting to use commodity price derivative products as stipulated in Article 6 of this Circular.

9. Other contents according to internal management requirements of commercial banks to ensure safe and effective operations in providing commodity price derivative products.

Article 8. Accounting Records

Commercial banks shall maintain accounting records for the provision of commodity price derivative products in accordance with Vietnamese Accounting Standards and the accounting account system regulations of credit institutions and foreign bank branches issued by the State Bank of Vietnam.

Chapter II
SPECIFIC PROVISIONS

Section 1
PROVISION OF COMMODITY PRICE DERIVATIVE PRODUCTS TO CUSTOMERS IN THE NON-CENTRALIZED MARKET

Article 9. Scope of supply of derivative products based on commodity prices for customers in the non-concentrated market

1. Commercial banks are authorized to conclude and perform non-standard contracts on commodity price derivatives with customers in the non-concentrated market, including:

a) Commodity price swap contract is a non-standard contract on commodity price derivatives, under which the commercial bank and the customer simultaneously agree to buy and sell the same type of underlying commodity, nominal quantity of the underlying commodity, and determination time within the validity period of the commodity price swap contract; accordingly, one party will purchase at a fixed price while selling at a reference price, and the other party will sell at a fixed price while purchasing at a reference price at the determined time within the validity period of the commodity price swap contract; the settlement between the commercial bank and the customer is based on the difference between the fixed price and the reference price and the nominal quantity of the underlying commodity;

b) Non-standard call option contract on commodity price is a non-standard contract on commodity price derivatives, under which the commercial bank sells to the customer the right (but not the mandatory obligation) to purchase a nominal quantity of the underlying commodity at an exercise price at a determined time within the validity period of the non-standard call option contract on commodity price. Within the validity period of the non-standard call option contract on commodity price, if the reference price of the underlying commodity is higher than the exercise price, upon the customer's request to exercise the right, the commercial bank must settle the amount calculated based on the difference between the exercise price and the reference price of the underlying commodity and the nominal quantity of the underlying commodity to the customer; if the reference price of the underlying commodity is lower than the exercise price, there will be no settlement between the commercial bank and the customer regarding the difference between the exercise price and the reference price of the underlying commodity. The customer must pay a fee to the commercial bank as agreed in the non-standard call option contract on commodity price to purchase the call option on commodity price; this fee may be paid once or multiple times during the validity period of the non-standard call option contract on commodity price according to the agreement in the non-standard call option contract on commodity price;

c) Non-standard put option contract on commodity price is a non-standard contract on commodity price derivatives, under which the commercial bank sells to the customer the right (but not the mandatory obligation) to sell a nominal quantity of the underlying commodity at an exercise price at a determined time within the validity period of the non-standard put option contract on commodity price. Within the validity period of the non-standard put option contract on commodity price, if the reference price of the underlying commodity is lower than the exercise price, upon the customer's request to exercise the right, the commercial bank must settle the amount calculated based on the difference between the exercise price and the reference price of the underlying commodity and the nominal quantity of the underlying commodity to the customer; if the reference price of the underlying commodity is higher than the exercise price, there will be no settlement between the commercial bank and the customer regarding the difference between the exercise price and the reference price of the underlying commodity. The customer must pay a fee to the commercial bank as agreed in the non-standard put option contract on commodity price to purchase the put option on commodity price; this fee may be paid once or multiple times during the validity period of the non-standard put option contract on commodity price according to the agreement in the non-standard put option contract on commodity price;

d) A non-standard derivative price contract combining ceiling and floor is a non-standard derivative price contract, under which the commercial bank sells to the customer the right (not an obligatory obligation) to purchase (or sell) a nominal quantity of underlying goods at a limited ceiling (or floor) exercise price, while purchasing from the customer the right (not an obligatory obligation) to sell (or buy) a nominal quantity of underlying goods at a limited floor (or ceiling) exercise price, on the same nominal quantity of underlying goods at a specified time during the term of the non-standard derivative price contract combining ceiling and floor. During the term of the non-standard derivative price contract combining ceiling and floor, if the reference price of the underlying goods is higher than the limited ceiling exercise price (or lower than the limited floor exercise price), upon the customer's request to exercise the right, the commercial bank must make payment to the customer an amount calculated based on the difference between the limited ceiling exercise price (or limited floor exercise price) and the reference price of the underlying goods and the nominal quantity of underlying goods; if the reference price of the underlying goods is lower than the limited floor exercise price (or higher than the limited ceiling exercise price), upon the commercial bank's request, the customer must make payment to the commercial bank an amount calculated based on the difference between the limited floor exercise price (or limited ceiling exercise price) and the reference price of the underlying goods and the nominal quantity of underlying goods; if the reference price of the underlying goods is lower than the limited ceiling exercise price and higher than the limited floor exercise price, then there will be no payment between the commercial bank and the customer for the difference between the exercise price and the reference price of the underlying goods. The commercial bank and the customer agree in the non-standard derivative price contract combining ceiling and floor on the payment of fees and the amount of fees to be paid.

2. The validity period of the non-standard derivative price contract does not exceed the validity period of the original transaction.

Article 10. Non-standard derivative price contracts

1. The commercial bank agrees with the customer on the provision of derivative price products in a non-standard derivative price contract in accordance with the provisions of this Circular and relevant laws. A non-standard derivative price contract must include at least the following contents:

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

b) Original transaction; type of underlying goods; quantity of underlying goods; applicable price of underlying goods in the original transaction; validity period of the original transaction; original transaction settlement schedule;

c) Exercise prices for derivative price products;

d) Term of the contract transaction;

đ) Regular settlement date and settlement method;

e) Settlement amounts;

g) Validity of the contract;

h) Rights and obligations of the parties;

i) Cases of early termination and modification of the contract; breach penalty agreement.

2. In addition to the contents stipulated in Clause 1 of this Article, a non-standard derivative price contract may include other contents agreed upon by the parties in accordance with the provisions of this Circular and relevant laws.

3. The commercial bank and the customer may agree to apply the International Swaps and Derivatives Association's Model Contract provided that the contents of the non-standard derivative price contract do not contravene the provisions of this Circular and relevant laws.

4. A non-standard derivative price contract may be established in the form of a framework contract and/or specific contract.

Article 11. Matching Transactions

1. Commercial banks must conduct matching transactions with foreign counterparties to balance risks from non-standard derivative commodity price contracts concluded and performed with customers as follows:

a) The commercial bank’s matching transaction shall be the contract specified in points a, b, c, and d of Clause 1, Article 9 and points a, b, and c of Clause 1, Article 13 of this Circular;

b) The goods in the matching transaction are underlying goods;

c) The nominal quantity of underlying goods and the validity period of the matching transaction must match the nominal quantity of underlying goods and the validity period of the non-standard derivative commodity price contract concluded and performed with the customer;

d) In case there is a change related to the non-standard derivative commodity price contract due to changes in the original transaction, the commercial bank must adjust the matching transaction with the foreign counterparty in accordance with the provisions of points a, b, and c of this clause and internal regulations stipulated in Clause 6, Article 7 of this Circular;

đ) In case the matching transaction between the commercial bank and the foreign counterparty is terminated prematurely, the commercial bank must perform another matching transaction with a validity period and nominal quantity of underlying goods that match the remaining validity period and nominal quantity of underlying goods in the non-standard derivative commodity price contract concluded and performed with the customer; if the commercial bank cannot perform another matching transaction for the remaining validity period and nominal quantity of underlying goods in the non-standard derivative commodity price contract concluded and performed with the customer, then within ten working days from the date of terminating the matching transaction, the commercial bank must develop a risk-balancing plan from the non-standard derivative commodity price contract concluded and performed with the customer and report to the State Bank of Vietnam (Department of Monetary Policy and Banking Supervision Authority) on the reasons for occurrence, measures, and timeframes for resolution;

e) In case the non-standard derivative commodity price contract between the commercial bank and the customer is terminated prematurely, the commercial bank must terminate the matching transaction with the foreign counterparty;

2. When conducting matching transactions with foreign counterparties, in addition to the provisions of Clause 1 of this Article, the commercial bank must conduct such transactions with foreign counterparties rated at least Baa/P-3 according to Moody's Investors Service rating or BBB-/A-3 according to Standard & Poor's rating or BBB-/F3 according to Fitch Ratings at the time of concluding the non-standard derivative commodity price contract, except in cases where a foreign bank branch conducts matching transactions with the parent bank or with a foreign branch of the parent bank.

Article 12. Security Measures

The commercial bank and the customer agree on the application or non-application of security measures to fulfill obligations under the non-standard derivative commodity price contract in accordance with the provisions of the law on secured transactions and relevant laws.

Section 2
SUPPLY OF DERIVATIVE COMMODITY PRICE PRODUCTS TO CUSTOMERS THROUGH FOREIGN COMMODITY EXCHANGE PLATFORMS

Article 13. Scope of Supplying Derivative Products Based on Commodity Prices for Customers through Foreign Commodity Exchanges

1. Commercial banks are allowed to accept and place customers' orders for buying and selling standardized derivative contracts based on commodity prices on foreign commodity exchanges, including:

a) Futures contracts on commodity prices;

b) Standardized call option contracts on commodity prices;

c) Standardized put option contracts on commodity prices.

2. Commercial banks may only accept and place orders for buying and selling standardized derivative contracts based on commodity prices from customers on foreign commodity exchanges when the transaction period of the standardized derivative contracts does not exceed the validity period of the original transaction.

Article 14. Contracts for Acceptance and Execution of Orders for Buying and Selling Standardized Derivative Contracts Based on Commodity Prices

1. Commercial banks shall agree with customers on accepting and executing orders for buying and selling standardized derivative contracts based on commodity prices through foreign commodity exchanges in accordance with the provisions of this Circular and relevant laws. The contract for acceptance and execution of orders for buying and selling standardized derivative contracts based on commodity prices must include at least the following contents:

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

b) Content of accepting and placing orders from customers for buying and selling standardized derivative contracts based on commodity prices on foreign commodity exchanges; confirmation of customer orders and notification;

c) Limitations and restrictions on accepting and executing orders for buying and selling standardized derivative contracts based on commodity prices;

d) Margin;

đ) Fees and other payments;

e) Rights and obligations of the parties;

g) Situations for changing the contract and terminating the contract prematurely;

h) Dispute resolution and contract liquidation.

2. In addition to the contents stipulated in Clause 1 of this Article, the contract for acceptance and execution of orders for buying and selling standardized derivative contracts based on commodity prices may include other contents agreed upon by the parties in accordance with the provisions of this Circular and relevant laws.

3. The contract for acceptance and execution of orders for buying and selling standardized derivative contracts based on commodity prices can be established in the form of a framework agreement and/or specific agreements.

Article 15. Margin for Buying and Selling Standardized Derivative Contracts Based on Commodity Prices

1. Commercial banks shall agree on the margin level of customers based on the regulations of foreign commodity exchanges or the requirements of foreign partners and the financial capacity of customers to ensure the fulfillment of obligations arising from the contract for acceptance and execution of orders for buying and selling standardized derivative contracts based on commodity prices.

2. Customers must open and maintain a minimum balance on their margin account before and during the period when they use derivative products based on commodity prices through foreign commodity exchanges; if customers fail to maintain the minimum balance on their margin account as agreed with commercial banks, commercial banks have the right to close out all or part of the customers' buy and sell orders.

Chapter III
RIGHTS AND OBLIGATIONS OF ORGANIZATIONS AND INDIVIDUALS RELATED TO THE ACTIVITY OF SUPPLYING DERIVATIVE PRODUCTS BASED ON COMMODITY PRICES

Article 16. Rights and responsibilities of commercial banks

1. Commercial banks have the following rights:

a) To request customers to provide information and documents proving their compliance with the conditions for using commodity price derivative products as stipulated in Article 5 of this Circular; other information and documents related to the provision of commodity price derivative products in accordance with the provisions of this Circular.

b) To request customers to notify changes related to the underlying transaction so that the commercial bank can examine and handle issues related to the provision of commodity price derivative products;

c) Other rights agreed upon by the commercial bank and the customer in accordance with the provisions of this Circular and relevant laws.

2. Commercial banks have the following responsibilities:

a) To implement centralized management and risk control of the provision of commodity price derivative products at the head office of the commercial bank. Branches of foreign banks providing commodity price derivative products shall implement management and risk control in accordance with the regulations of the parent bank, in compliance with the provisions of this Circular;

b) To provide accurate information to customers about commodity price derivative products, potential risks, types and levels of fees if applicable, so that customers understand, consider, and decide on the use of commodity price derivative products and take preventive measures against risks;

c) To study foreign legal regulations and international market developments related to commodity price derivative products, and information on credit ratings of foreign counterparties to ensure the safe and effective operation of the provision of commodity price derivative products;

d) Other responsibilities agreed upon by the commercial bank and the customer in accordance with the provisions of this Circular and relevant laws.

Article 17. Rights and responsibilities of customers using commodity price derivative products

1. Customers have the following rights:

a) To request commercial banks to provide accurate information about commodity price derivative products, potential risks, types and levels of fees if applicable, so that customers understand, consider, and decide on the use of commodity price derivative products and take preventive measures against risks;

b) Other rights agreed upon by the customer and the commercial bank in accordance with the provisions of this Circular and relevant laws.

2. Customers have the following responsibilities:

a) To provide information and documents proving their compliance with the conditions stipulated in Article 5 of this Circular. To bear legal responsibility for the accuracy and truthfulness of the information and documents provided to the commercial bank;

b) To promptly notify changes in the underlying transaction so that the commercial bank can review and adjust the contract for receiving, executing buy and sell orders of standardized commodity price derivative contracts, non-standardized commodity price derivative contracts, and offsetting transactions;

c) Other responsibilities agreed upon by the customer and the commercial bank in accordance with the provisions of this Circular and relevant laws.

Chapter IV
IMPLEMENTING PROVISIONS

Article 18. Effective Date

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

2. For contracts for the provision of commodity price derivative products concluded before the date this Circular takes effect, commercial banks shall continue to perform the contents recorded in the contract in accordance with the laws in force at the time of concluding the contract for the provision of commodity price derivative products or amend and supplement the contract for the provision of commodity price derivative products in accordance with the provisions of this Circular.

3. In cases where commercial banks are approved by the State Bank of Vietnam to pilot commodity price derivative products, commercial banks shall continue to implement the contents of the pilot commodity price derivative products until the end of the approved pilot period by the State Bank of Vietnam. For contracts for the provision of commodity price derivative products concluded after the date this Circular takes effect, the conclusion and performance of the contract must comply with the provisions of this Circular.

Article 19. Implementation

The Director of the Office, the Head of the Monetary Policy Department, the Heads of units under the State Bank of Vietnam, the Governors of the State Bank of Vietnam branches in provinces and centrally-administered cities, the Chairmen of the Board of Directors, the Chairmen of the Board of Members, and the General Directors (Directors) of commercial banks are responsible for organizing the implementation of this Circular.