| 3.1 | This framework applies to all domestic banks both on a consolidated basis, which include all branches and subsidiaries, and on a standalone basis.
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| 3.2 | This framework is not applicable to Foreign Banks Branches operating in the kingdom of Saudi Arabia, and the branches shall comply with the regulatory capital requirements stipulated by their respective home regulators.
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| 3.3 | The risks subject to market risk capital requirements include but are not limited to:
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| | (1) | Default risk, interest rate risk, credit spread risk, equity risk, foreign exchange (FX) risk and commodities risk for trading book instruments; and
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| | (2) | FX risk and commodities risk for banking book instruments.
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| 3.4 | All transactions, including forward sales and purchases, shall be included in the calculation of capital requirements as of the date on which they were entered into. Although regular reporting will in principle take place quarterly, banks are expected to manage their market risk in such a way that the capital requirements are being met on a continuous basis, including at the close of each business day. Banks should not window-dress by showing significantly lower market risk positions on reporting dates. Banks will also be expected to maintain strict risk management systems to ensure that intraday exposures are not excessive. If a bank fails to meet the capital requirements at any time, Bank shall takes immediate measures to rectify the situation and immediately notify SAMA.
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| 3.5 | A matched currency risk position will protect a bank against loss from movements in exchange rates, but will not necessarily protect its capital adequacy ratio. If a bank has its capital denominated in its domestic currency and has a portfolio of foreign currency assets and liabilities that is completely matched, its capital/asset ratio will fall if the domestic currency depreciates. By running a short risk position in the domestic currency, the bank can protect its capital adequacy ratio, although the risk position would lead to a loss if the domestic currency were to appreciate. SAMA may allow Banks who protect their capital adequacy ratio in this way and exclude certain currency risk positions from the calculation of net open currency risk positions, subject to meeting each of the following conditions:
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| | (1) | The risk position is taken or maintained for the purpose of hedging partially or totally against the potential that changes in exchange rates could have an adverse effect on its capital ratio.
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| | (2) | The risk position is of a structural (ie non-dealing) nature such as positions stemming from:
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| | | (a) | Investments in affiliated but not consolidated entities denominated in foreign currencies; or
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| | | (b) | Investments in consolidated subsidiaries or branches denominated in foreign currencies.
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| | (3) | The exclusion is limited to the amount of the risk position that neutralises the sensitivity of the capital ratio to movements in exchange rates.
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| | (4) | The exclusion from the calculation is made for at least six months.
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| | (5) | The establishment of a structural FX position and any changes in its position must follow the bank’s risk management policy for structural FX positions. This policy must be shared with SAMA for notification.
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| | (6) | Any exclusion of the risk position needs to be applied consistently, with the exclusionary treatment of the hedge remaining in place for the life of the assets or other items.
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| | (7) | Banks are required to document and have available for SAMA review the positions and amounts to be excluded from market risk capital requirements.
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| 3.6 | No FX risk capital requirement need apply to positions related to items that are deducted from a bank’s capital when calculating its capital base.
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| 3.7 | Holdings of capital instruments that are deducted from a bank’s capital or risk weighted at 1250% are not allowed to be included in the market risk framework. This includes:
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| | (1) | Holdings of the bank’s own eligible regulatory capital instruments; and
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| | (2) | Holdings of other banks’, securities firms’ and other financial entities’ eligible regulatory capital instruments, as well as intangible assets,
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| | (3) | Where a bank demonstrates that it is an active market-maker, then SAMA will establish a dealer exception for holdings of other banks’, securities firms’, and other financial entities’ capital instruments in the trading book. In order to qualify for the dealer exception, the bank must have adequate systems and controls surrounding the trading of financial institutions’ eligible regulatory capital instruments.
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| 3.8 | In the same way as for credit risk and operational risk, the capital requirements for market risk apply on a worldwide consolidated basis.
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| | (1) | Banking and financial entities in a group which is running a global consolidated trading book and whose capital is being assessed on a global basis allowed to include the net short and net long risk positions no matter where they are booked.1
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| | (2) | SAMA will grant above treatment only when the standardised approach in [6] to [9] permits a full offset of the risk position (ie risk positions of the opposite sign do not attract a capital requirement).
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| | (3) | Nonetheless, there will be circumstances in which SAMA demand that the individual risk positions be taken into the measurement system without any offsetting or netting against risk positions in the remainder of the group. This may be needed, for example, where there are obstacles to the quick repatriation of profits from a foreign subsidiary or where there are legal and procedural difficulties in carrying out the timely management of risks on a consolidated basis.
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| | (4) | Moreover, SAMA will retain the right to continue to monitor the market risks of individual entities on a non-consolidated basis to ensure that significant imbalances within a group do not escape supervision. Banks should not conceal risk positions on reporting dates in such a way as to escape measurement.
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