Classification - Internal

Published Date: 3 May 2024

Product and Risk Disclosure

Statement for Principal Only
Swap (POS)

1 Product Disclosure Statement – Principal Only Swap

 Classification - Internal

1. Features
1.1 Definition of a POS
An OTC foreign exchange derivative contract which commits two counterparties (Bank and user) to
exchange streams of principal amounts in two different currencies on specified dates over the
duration of the swap at a pre-agreed exchange rate. The two parties may agree to exchange the two
currencies normally at the prevailing spot exchange rate with an agreement to reverse the exchange
of currencies, at the same spot exchange rate, at a fixed date in the future, generally at the maturity
of the swap.
A user may use a principal-only swap (POS) to hedge principal repayment both under bullet (single
transaction) and staggered (amortised) repayment schedule

1.2 Types of POS

We can categorize POS basis currency pairs
(i) INR to FCY
Here, primary currency is INR, meaning we have an INR underlying (INR Term Loan/ STL/ WCDL, etc)
and the company is looking to swap / convert its underlying through foreign exchange market to FCY
depending on its requirements.
(ii) FCY to INR
Here, primary currency is FCY, meaning we have an FCY underlying (ECB) and the company is looking
to swap or hedge its underlying through foreign exchange market to INR depending on its
requirements.
(iii) FCY1 to FCY2
Here, both primary and secondary currencies are FCY, meaning we have an FCY underlying (ECB) and
the company is looking to swap / convert its underlying through foreign exchange market to some
other FCY depending on its requirements.

All features and other terms and conditions of option contracts will be guided by the extant Governing
Directions issued by RBI which lay down the guidelines to be followed for offering Derivative OTC
products based on broad principles enumerated therein. Current guidelines governing the Option
contracts as on date of publishing of this document are:

1. Circular captioned “Master Direction - Risk Management and Inter-Bank Dealings” as updated by
RBI from time-to-time.
2. The Master Direction – Reserve Bank of India (Market-makers in OTC Derivatives) Directions, 2021
as may be amended from time-to-time.

1.3 Pricing of POS

A currency swap will have two currencies, say INR (R) and USD ($). The swap is initiated at time t0 and
involves an exchange of a principal amount NR against the principal M$ which are settled at settlement
dates {t1, t2, …, tn}

POS can be used to change a liability (borrowing) from a higher interest-bearing currency to a lower
interest bearing currency. The cost of POS is the forward premium considered while arriving at the
fixed exchange rate for repayment in future on preset dates. Forward premium is calculated on basis
of difference of interest rates between two currencies.

The POS deal is priced using below market variables

• CCY1/CCY2 Spot rate
• CCY1/CCY2 forward rates
• CCY1/CCY2 swap curve

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The POS is valued by discounting the future cash flows for both legs at the market interest rate
applicable at that time. The sum of the cash flows denoted in the foreign currency is converted with
the spot rate applicable at that time. The benchmarks in pricing a currency swap involving INR are IRS
and MIFOR curves.

1.4 Market Convention

Table below summarises market conventions for POS in some of the currency pairs.
USD- INR EUR-INR YEN-INR
Settlement T + 2 Days T + 2 Days T + 2 Days
INR Leg Day Count ACT/365 ACT/365 ACT/365
FCY Leg Day Count ACT/ 360 ACT/360 ACT/365
Business Adjustment Modified Modified Modified
Following Following Following

Day count
Number of days in a year considered for calculation of interest

Business Adjustment Convention

For the settlement date, the “modified following business day” convention will be followed. This
means that if the original settlement date falls on a holiday, the swap will get extended to the next
working day and the settlement will take place on the next working day.
However, in a case where the extended settlement date falls into the succeeding calendar month,
then the settlement day rolls backward to the immediately preceding business day.
These are indicative and please refer to the deal confirmation for the actual conventions applicable to
the specific transaction

1.5 Eligible Users

Under the “Master Direction - Risk Management and Inter-Bank Dealings” (Directions) as updated by
RBI from time-to-time, both ‘Retail’ and ‘Non-retail’ category of users (including Non-Resident users)
are eligible to enter into a currency swap through an AD bank.

For the purpose of offering derivative contracts to a user, the Authorised Dealer shall classify the user
either as a “retail” user or as a “non-retail” user.

1.5 Underlying Exposure Requirements

(i) Contracted Exposure (CE)
The aforesaid Directions define Contracted Exposure as “An exposure to the exchange rate of INR
against a foreign currency on account of current and capital account transactions permissible under
FEMA, 1999 or any rules or regulations made thereunder, which have already been entered into.”

• For swap contracts can be booked under “Contracted Exposure” facility where the user shall
have to submit evidence of underlying exposure to the bank within 15 calendar days of the trade being
entered into/booked.
• In the event the evidence of the underlying exposure is not provided by the user within the
aforementioned stipulated timeline, the bank reserves the right to cancel the swap contract and the
exchange gain if any will not be passed to the user by the bank while the user shall be liable to pay
any exchange loss in the event of such cancellation.
• Submission of underlying documents can be by way of physical delivery or in any electronic
form as per mutually acceptable media including but not limited to email.

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• Cancellation and rebooking are freely allowed for swap contracts booked under “Contracted
exposure” as long as the notional and/or maturity tenor of the swap contract does not exceed the
underlying exposure.
• No swap transactions involving upfront payment of Rupees or its equivalent in any form shall
be undertaken
• The notional principal amount of the swap should not exceed the outstanding amount of the
underlying loan
• The maturity of the swap should not exceed the remaining maturity of the underlying loan.

2. Terms and conditions for net settlement and unwinding of POS

2.1 Events applicable post booking of a POS
A deal once booked can either be
• Continued till the date of settlement of interest and Principal
a. Net Settlement on each settlement date:
On each of the interest and principal settlement dates, cash flows will be net settled
based on the prevailing FX market rates applicable
b. Gross Interest Settlement on each settlement date:
On each of the interest and principal settlement dates, the user can exchange delivery
of the pay and receive side obligation in the respective currency by providing the
required documents as required by AD
In absence of instructions from the counterparty till & including the date of the settlement
(during forex business hours in India), the Bank reserves the right to net settle the cash
flows by applying the conversion rate of the relevant currency pair at the close of business
hours on the date of the settlement in India.

• Cancelled (prior to maturity date for part or full amount of the Swap contract)
As per regulation, the user is permitted to cancel a Swap Contract. Cancellation/unwind price
of a POS would be linked to its marked-to-market value which is based on parameters like
Spot Price, Discount curves, Forward swaps, etc. that affect the final pay off and their
sensitivity

3. Benefits
• To secure cheaper debt (by borrowing at the best available rate regardless of currency and
then swapping for debt in desired currency
• To hedge against (reduce exposure to) forward exchange rate fluctuations.
• No upfront cost is required to be paid by the user

4. Risks
• The user is exposed to market risk. The value of a Principal only swap will change as market
FX rates, and swap rates rise and fall, often referred to as delta and basis risks. The user is also
exposed to reset risks (where the publication of specific tenor benchmark (IBOR) indexes are
subject to daily fluctuation.

5. Pay-off profile (Upside/Downside risks)

A POS contract allows a user to enter into an OTC foreign exchange derivative contract to exchange
streams of principal amounts in two different currencies on specified dates over the duration of the
swap at a pre-agreed exchange rate. However, by doing so the user is exposed to foreign exchange
rate movement (favourable or adverse). Pay-off profile of a Swap is linear in nature and implies the
notional gain/loss on the swap contract by the end of maturity of the loan.

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Illustration 1 (INR- FCY POS):

Start Date: 17th Dec 2021
Maturity Date: 30th June 2024
INR Principal Amount: INR 100 Cr
USD Principal Amount: USD 13.16 Mio
Spot rate considered for conversion: 76.00
ABC Ltd: Receives 4% % fixed on their INR notional outstanding, Monthly, A/365
ABC Ltd: Pays Nil
Company gets a carry of 4% on its ROI

Pay off by Maturity:

For simplicity, the average rate for the tenor of loan has been taken to calculate the payoff.
ABC Ltd will receive a fixed carry depending upon the currency pair entered into and prevailing swap
curves.

The average spot at settlement has been taken as 80.3425, which is near break even for the structure.

Client Net cash

INR Opening INR USD Opening USD Client pays
Event Date receives inflow /
Principal Amortisation Principal Amortisation under swap
under swap outflow
31-03-2022 1,00,00,00,000 10,00,00,000 1,31,57,895 13,15,789 10,57,13,816 11,15,55,556 58,41,740
30-06-2022 90,00,00,000 10,00,00,000 1,18,42,105 13,15,789 10,57,13,816 10,91,00,000 33,86,184
30-09-2022 80,00,00,000 10,00,00,000 1,05,26,316 13,15,789 10,57,13,816 10,81,77,778 24,63,962
31-12-2022 70,00,00,000 10,00,00,000 92,10,526 13,15,789 10,57,13,816 10,71,55,556 14,41,740
30-03-2023 60,00,00,000 10,00,00,000 78,94,737 13,15,789 10,57,13,816 10,59,33,333 2,19,518
30-06-2023 50,00,00,000 10,00,00,000 65,78,947 13,15,789 10,57,13,816 10,51,11,111 -6,02,705
30-09-2023 40,00,00,000 10,00,00,000 52,63,158 13,15,789 10,57,13,816 10,40,88,889 -16,24,927
30-12-2023 30,00,00,000 10,00,00,000 39,47,368 13,15,789 10,57,13,816 10,30,33,333 -26,80,482
26-03-2024 20,00,00,000 10,00,00,000 26,31,579 13,15,789 10,57,13,816 10,19,33,333 -37,80,482
30-06-2024 10,00,00,000 10,00,00,000 13,15,789 13,15,789 10,57,13,816 10,10,66,667 -46,47,149
17,398

Scenario Analysis
The below table measures the impact of change in the average rate of spot at the pre-set settlement
dates

USD INR Total INR Client Total INR Client Cash Inflow/ Outflow
Scenario
Rate Pays receives in INR over life of swap
1 70 92,10,52,632 1,05,71,55,556 13,61,02,923.98
2 72 94,73,68,421 1,05,71,55,556 10,97,87,134.50
3 74 97,36,84,211 1,05,71,55,556 8,34,71,345.03
4 76 1,00,00,00,000 1,05,71,55,556 5,71,55,555.56
5 78 1,02,63,15,789 1,05,71,55,556 3,08,39,766.08
6 80 1,05,26,31,579 1,05,71,55,556 45,23,976.61
7 80.3425 1,05,71,38,158 1,05,71,55,556 17,397.66
8 82 1,07,89,47,368 1,05,71,55,556 (2,17,91,812.87)
9 84 1,10,52,63,158 1,05,71,55,556 (4,81,07,602.34)
10 86 1,13,15,78,947 1,05,71,55,556 (7,44,23,391.81)

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Cash Inflow/ Outflow in INR over life of swap (In Rs

Cr)
15.00

10.00

5.00

-
68 73 78 83 88
(5.00)

(10.00)
USD INR Spot

Illustration 2 (FCY-INR POS):

• ABC LTD has ECB outstanding of USD 10 mio
• ROI on the loan is 3% p.a.
• ABC LTD has sought to enter into USD to INR principal only swap to hedge their ECB
• By means of this hedge, the company will be able to protect its cashflow against Fx volatality
• Principal repayments on the loan are quarterly
• The maturity of the loan is on 30th June 2026

Start Date: 16th Dec 2021

Maturity Date: 30th June 2026
USD Principal Amount: USD 10 mio
INR Principal Amount: INR 75 Cr
Spot rate considered for conversion: 75.00
ABC Ltd: Receives Nil
ABC Ltd: Pays 5% fixed on their INR notional outstanding, Monthly, A/360
Company is hedged against its ECB repayments throughout the life of loan. The deal also helps match
the company’s INR receivables with INR liability

Amortization schedule below:

Event Initial USD Repayment Outstanding Initial INR Repayment Outstanding
Date Principal (USD) USD principal Principal (INR) INR Principal
30-09-2022 1,00,00,000 6,25,000 93,75,000 75,00,00,000 4,68,75,000 70,31,25,000
31-12-2022 93,75,000 6,25,000 87,50,000 70,31,25,000 4,68,75,000 65,62,50,000
31-03-2023 87,50,000 6,25,000 81,25,000 65,62,50,000 4,68,75,000 60,93,75,000
30-06-2023 81,25,000 6,25,000 75,00,000 60,93,75,000 4,68,75,000 56,25,00,000
30-09-2023 75,00,000 6,25,000 68,75,000 56,25,00,000 4,68,75,000 51,56,25,000
31-12-2023 68,75,000 6,25,000 62,50,000 51,56,25,000 4,68,75,000 46,87,50,000
31-03-2024 62,50,000 6,25,000 56,25,000 46,87,50,000 4,68,75,000 42,18,75,000
30-06-2024 56,25,000 6,25,000 50,00,000 42,18,75,000 4,68,75,000 37,50,00,000
30-09-2024 50,00,000 6,25,000 43,75,000 37,50,00,000 4,68,75,000 32,81,25,000
31-12-2024 43,75,000 6,25,000 37,50,000 32,81,25,000 4,68,75,000 28,12,50,000
31-03-2025 37,50,000 6,25,000 31,25,000 28,12,50,000 4,68,75,000 23,43,75,000
30-06-2025 31,25,000 6,25,000 25,00,000 23,43,75,000 4,68,75,000 18,75,00,000
30-09-2025 25,00,000 6,25,000 18,75,000 18,75,00,000 4,68,75,000 14,06,25,000

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31-12-2025 18,75,000 6,25,000 12,50,000 14,06,25,000 4,68,75,000 9,37,50,000

31-03-2026 12,50,000 6,25,000 6,25,000 9,37,50,000 4,68,75,000 4,68,75,000
30-06-2026 6,25,000 6,25,000 - 4,68,75,000 4,68,75,000 -

Pay off by Maturity:

For simplicity, the average exchange rate for the tenor of loan has been taken to calculate the payoff.
ABC Ltd will pay a fixed carry depending upon the currency pair entered into and prevailing swap
curves.

The average spot at settlement has been taken as 85.135, which is near break-even for the structure
USD USD INR Client
INR Opening Client pays Net cash inflow
Event Date Opening Amortisat Amortisatio receives
Principal under swap / outflow
Principal ion n under swap
30-09-2022 1,00,00,000 6,25,000 75,00,00,000 4,68,75,000 7,68,75,000 5,32,09,375 -2,36,65,625
31-12-2022 93,75,000 6,25,000 70,31,25,000 4,68,75,000 5,58,59,375 5,32,09,375 -26,50,000
31-03-2023 87,50,000 6,25,000 65,62,50,000 4,68,75,000 5,50,78,125 5,32,09,375 -18,68,750
30-06-2023 81,25,000 6,25,000 60,93,75,000 4,68,75,000 5,45,76,823 5,32,09,375 -13,67,448
30-09-2023 75,00,000 6,25,000 56,25,00,000 4,68,75,000 5,40,62,500 5,32,09,375 -8,53,125
31-12-2023 68,75,000 6,25,000 51,56,25,000 4,68,75,000 5,34,63,542 5,32,09,375 -2,54,167
31-03-2024 62,50,000 6,25,000 46,87,50,000 4,68,75,000 5,27,99,479 5,32,09,375 4,09,896
30-06-2024 56,25,000 6,25,000 42,18,75,000 4,68,75,000 5,22,07,031 5,32,09,375 10,02,344
30-09-2024 50,00,000 6,25,000 37,50,00,000 4,68,75,000 5,16,66,667 5,32,09,375 15,42,708
31-12-2024 43,75,000 6,25,000 32,81,25,000 4,68,75,000 5,10,67,708 5,32,09,375 21,41,667
31-03-2025 37,50,000 6,25,000 28,12,50,000 4,68,75,000 5,03,90,625 5,32,09,375 28,18,750
30-06-2025 31,25,000 6,25,000 23,43,75,000 4,68,75,000 4,98,37,240 5,32,09,375 33,72,135
30-09-2025 25,00,000 6,25,000 18,75,00,000 4,68,75,000 4,92,70,833 5,32,09,375 39,38,542
31-12-2025 18,75,000 6,25,000 14,06,25,000 4,68,75,000 4,86,71,875 5,32,09,375 45,37,500
31-03-2026 12,50,000 6,25,000 9,37,50,000 4,68,75,000 4,80,46,875 5,32,09,375 51,62,500
30-06-2026 6,25,000 6,25,000 4,68,75,000 4,68,75,000 4,74,67,448 5,32,09,375 57,41,927
8,854

Scenario Analysis
The below table measures the impact of change in the average rate of spot at the pre-set settlement
dates

Cash Inflow/
Total INR Total INR Client Outflow in INR
Scenario USD INR Rate
Client Pays receives over life of
swap
1 71 85,13,41,146 71,00,00,000 (14,13,41,146)
2 74 85,13,41,146 74,00,00,000 (11,13,41,146)
3 77 85,13,41,146 77,00,00,000 (8,13,41,146)
4 80 85,13,41,146 80,00,00,000 (5,13,41,146)
5 83 85,13,41,146 83,00,00,000 (2,13,41,146)
6 85.135 85,13,41,146 85,13,50,000 8,854
7 86 85,13,41,146 86,00,00,000 86,58,854
8 89 85,13,41,146 89,00,00,000 3,86,58,854
9 92 85,13,41,146 92,00,00,000 6,86,58,854
10 95 85,13,41,146 95,00,00,000 9,86,58,854

7 Product Disclosure Statement – Principal Only Swap

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Cash Inflow/ Outflow in INR over life of swap (In Cr)

15
10
5
-
68 73 78 83 88 93 98
(5)
(10)
(15)
(20)
USD/INR

6. Set up of POS booking facility

Bank will set up POS booking facility for its users who wish to avail the facility on a case-to-case basis,
subject to due diligence, credit appraisal of the user’s financials, documentation execution etc as per
internal processes of the bank. For the purpose of the same, the bank might ask the user to put up
margin money, collateral, MTM etc. as per bank’s internal appraisal and assessment and the same
would be mutually agreed with the user before setting up internal limits for entering into a POS. Before
offering this facility, the user might have to provide documentation like ISDA, FX facility agreement
etc which shall contain other mutually agreed conditions relating to termination and events of default

7. Costs and fees, including break-up

HDFC Bank will act as a principal on its own behalf as a counterparty to the user taking on one or more
risks in connection with an order/price, including credit risk and varying degrees of market risk.

The interest exchange rate and the spot rate under the POS contracted with user, will be dependent
on the prevailing interbank rates and be inclusive of a mark-up adjustment. The factors that may
contribute to the mark up adjustment, will amongst other things include counterparty credit risk,
capital costs, liquidity risk, tenor risk premium.

In addition, there will be statutory charges (stamp duties etc.) as per applicable guidelines

8. Risk Disclosure Statement

Below Risk Disclosure Statement is in line with ‘The Master Direction – Reserve Bank of India (Market-
makers in OTC Derivatives) Directions, 2021’, vide Notification No. FMRD.FMD.08/02.03.247/2021-22
dated 16th September 2021. This will be applicable to all the transactions done with the bank on this
product and the user is advised to refer to the below Risk Disclosure Statement before dealing in each
such transaction.

a) Rationale of the Transaction

The deal enables counterparty to convert its liability from one currency to another depending on
client’s requirements and view on markets.

b) Sensitivity Analysis identifying various parameters that affect the product

User is exposed to the Mark to market movement during the tenor of the POS.

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This specific scenario analysis shared above is provided solely for illustrative and informational
purposes. It illustrates the effect that changes in the USD/INR spot on the principal exchange date(s)
may have on the indicative value of this transaction. The spot rates used is not the only ones that
might reasonably have been selected. A variety of other or additional spot rates could result in
different indicative values of this transaction. No representation or warranty is made that the spot
rates so selected will apply in the future on the respective principal exchange date(s). This scenario
analysis is not intended to illustrate the effect that changes in spot rates may have on the unwind
price of this transaction. The actual unwind price of this transaction at any given time will be
dependent on the then prevailing spot and forward rates as well as the MIFOR curve for the remaining
tenor of the transaction as well as the accrual from the last interest payment date to the unwind
effective date. Cancellation/unwind price of a POS would be linked to mark to market which is based
on the following parameters that affect the final pay off and their sensitivity:

Parameters involved in Pricing

• Spot price
• Forward swap price
• Discount curve

The table below shows the impact on the unwind price for the user due to changes in one of the
underlying variables while keeping the other variables fixed in case of INR- FCY swap

Variable Movement Impact on Unwind

Increases Negative
Spot Rate (FCY/INR)
Decreases Positive
Increases Negative
MIFOR (for residual tenor)
Decreases Positive

The table below shows the impact on the unwind price for the user due to changes in one of the
underlying variables while keeping the other variables fixed in case of FCY-INR Swap

Variable Movement Impact on Unwind

Increases Positive
Spot Rate
Decreases Negative
Increases Positive
MIFOR (for residual tenor)
Decreases Negative

9. General Disclosure
9.1 This Product Disclosure Statement and Risk Disclosure Statement will be applicable to all
the transactions done with the bank in this product and the user is advised to refer and
understand these before deciding to execute each such transaction. This Product Disclosure
Statement is not intended as an offer or solicitation for the purchase or sale of any financial
instrument.
9.2 This transaction is a sophisticated financial instrument and involves a significant degree
of various risks, including market risk, credit risk, and liquidity risk.
9.3 The user is expected to have sufficient knowledge and experience and seek independent
professional advice to make their own evaluation of the risks and rewards of doing this
transaction

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9.4 The user is expected to have internal risk management framework and approval for
dealing in the product based on their Risk management policy
9.5 HDFC Bank assumes no fiduciary responsibility or liability for any consequences, financial
or otherwise, arising from this transaction.
9.6 The user is responsible to obtain tax, accounting, legal and other advice as considered
necessary from third party professionals.
9.7 The features and Terms & Conditions mentioned above in this Product Disclosure
Statement includes only indicative terms, conditions and risks associated with the
transactions under this product. This statement has not been prepared based on any research
on the transactions in this product nor from any similar report. These are subject to change
as determined by HDFC Bank depending on the changes in the extant guidelines from time-
to-time or change in market dynamics. The individual contract confirmations shall be referred
to by the user as it contains the exact specific details of the transaction and governing terms
and conditions of the contract, and the same shall be binding on the user.
9.8 The Transactions under this product will be governed by and subject to the ISDA Master
Agreement (including the Schedule, any Credit Support Annex) or any other similar document,
wherever applicable; confirmation for transactions under this product and amendments (if
any) to the foregoing documents executed between Party A and Party B from time-to-time.
9.9 These statements are confidential and shall not be disclosed, reproduced, redistributed
or transmitted, in whole or in part in any manner whatsoever, without the prior written
consent of HDFC Bank Ltd. Any unauthorized use or disclosure is strictly prohibited.

10 Product Disclosure Statement – Principal Only Swap