Friday, 25 September 2020 07:08

CB issues directions on SWAP deal

The Central Bank has issued operating instructions to Licensed Commercial Banks (LCBs) on the “USD/LKR Buy - Sell Currency SWAPs” for tenors beyond one year and up to two years under the scheme named “Inward Investments SWAPs Scheme (IIS Scheme)”.

The move is to encourage fresh foreign inflows to the country.

The Central Bank said the objective of offering the lIS Scheme is to facilitate LCBs to hedge the foreign exchange risk pertaining to foreign currency inflows that are channelled through the Inward Investment Accounts (IIA).

Accordingly, LCBs have been invited to enter into SWAP agreements with the CBSL under the IIS Scheme, adhering to operating instructions and the direction.

The counterparties are CBSL and Individual LCBs. Eligible investors are non-resident investors who are eligible to operate Inward Investment Accounts (IIA)

SWAPs are applicable to new foreign currency inflows to the country channelled through IIA with effect from 23.09.2020, and the tenor will be one year and up to two years. The minimum deal size is $ 25 million per non-resident investor.

Pricing mechanism between CBSL and LCB will be the same exchange rate for the near and far legs of the SWAP between the two parties (i.e., zero cost SWAPs).

There are several conditions of the IIS Scheme. They are:

Prior to entering into a SWAP deal with a non-resident investor, the limit availability under the IIS scheme should be checked by the LCB with International Operations Department (IOD) of the CBSL.

Prior to entering into the deal with the CBSL, an LCB should disclose the source of funds, underlying transaction/s and the details of the respective non-resident investor, to IOD of the CBSL.

A maximum of 0.10% on the investment value may be charged as a SWAP premium from a non-resident investor by the LCB.

The CBSL does not encourage pre-mature unwinding of SWAPs under the IIS Scheme. However, in an unavoidable circumstance, if a non-resident investor requests for a pre-mature unwinding of an IIS, in return, the LCB should terminate the SWAP agreement with the CBSL. In such a scenario, the Settlement Exchange Rate applicable for the settlement between the CBSL and LCB, shall be as follows:

If prevalent USD/LKR spot rate is higher than the agreed settlement rate (i.e., LKR depreciated), the revised settlement rate should be the prevalent indicative USD /LKR spot exchange rate plus the penalty.

If prevalent USD/LKR spot rate is lower than the agreed settlement rate (i.e., LKR appreciated), the revised settlement rate should be the near leg USD / LKR spot rate plus the penalty.

The penalty should be 2% on agreed USD/LKR Settlement Exchange Rate.

LCBs are requested to follow the standard settlement procedure when settling the above SWAP transactions with the CBSL. Further, LCBs are requested to comply with the applicable directions issued by the CBSL, from time to time.

The CBSL has a right to withdraw the IIS Scheme without any notice, in advance.


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