5. Measurement of Exposures Values
5.1. General Measurement Principles
Banks shall adhere to the following principles in measuring the values of exposures:
i. The exposure values to be considered for identifying large exposures to a counterparty are all those exposures defined under the risk-based capital framework. Accordingly, banks must consider both on and off-balance sheet exposures included in either the banking or trading books, and instruments with counterparty credit risk under the risk-based capital framework;
ii. In case the counterparty is part of a Group of Connected Counterparties, the values of exposures to all individual counterparties within a group of connected counterparties must be aggregated.
iii. An exposure amount to a counterparty that is deducted from capital must not be added to other exposures to that counterparty for the purpose of the large exposures limit. This general approach does not apply where an exposure is 1,250% risk- weighted. When this is the case, this exposure must be added to any other exposures to the same counterparty and the sum subject to the large exposures limit, except if this exposure is specifically exempted for other reasons.
5.2. Eligible Credit Risk Mitigation (CRM) Techniques
This section should be read in conjunction with the credit risk mitigation framework (chapter 9 of Minimum Capital Requirements for Credit Risk) , issued by SAMA circular No (44047144), dated 04/06/1444 H, Corresponding To 27/12/2022 G.Eligible credit risk mitigation techniques for large exposures purposes are those that meet the minimum requirements and eligibility criteria for the recognition of unfunded credit protection5 and financial collateral that qualify as eligible financial collateral under the standardised approach for risk-based capital requirement purposes. (Note: SAMA does not consider equities, including convertible bonds and Undertakings for Collective Investments in Transferable Securities as eligible CRM mitigants)
Other forms of collateral that are only eligible under the Internal-ratings based (IRB) approach in accordance with Paragraph 31, Basel III IRB Approaches Prudential Returns And Guidance Notes, 2014 (Only Equities for margin lending exposures has been allowed in the aforementioned paragraph, as eligible CRM. SAMA does not recognize any IRB collaterals i.e. financial Receivable, Residential Real Estate. Commercial Real Estate. Physical Cards, etc., under the IRB approach) are not eligible to reduce exposure values for large exposures purposes.
A bank must recognize an eligible CRM technique in the calculation of an exposure whenever it has used this technique to calculate the risk-based capital requirements, and provided it meets the conditions for recognition under the large exposures framework;
i. Treatment of maturity mismatches in CRM
a. In accordance with provisions set out in the risk-based capital framework6, hedges with maturity mismatches are recognised only when their original maturities are equal to or greater than one year and the residual maturity of a hedge is not less than three months.
b. If there is a maturity mismatch in respect of credit risk mitigants (collateral, on-balance sheet netting, guarantees and credit derivatives) recognised in the risk-based capital requirement, the adjustment of the credit protection for the purpose of calculating large exposures is determined using the same approach as in the risk-based capital requirement.7
ii. On-balance sheet netting8
a. Where a bank has in place legally enforceable netting arrangements for loans and deposits, it may calculate the exposure values for large exposures purposes according to the calculation it uses for capital requirements purposes - i.e. on the basis of net credit exposures subject to the conditions set out in the approach to on-balance sheet netting in the risk-based capital requirement.9
5 Unfunded credit protection refers collectively to guarantees and credit derivatives the treatment of which is described in Section 6, Basel II - SAMA's Detailed Guidance Document relating to Pillar 1, June 2006, and GN 2 of Basle II Package of Bank Prudential Returns and Guidance Notes Concerning Standardized Approach, 2007.
6 See, Credit Risk Mitigation - Chapter 6.5 Pages 164/165, Basel II - SAMA's Detailed Guidance Document 2006 and GN 2, Pages No 12/13,Basel II, Package Of Bank Prudential Returns And Guidance Notes Concerning Standardized Approach, 2007.
7 See Credit Risk Mitigation - Chapter 6.5 Page 164/165, Basel II - SAMA's Detailed Guidance Document, 2006.
8 This should not be currently applied to exposures based in KSA as netting is not currently permitted within the legal framework.
9 See Credit Risk Mitigation - Chapter 6.2 Page 158 and 159, Basel II - SAMA's Detailed Guidance Document, 2006.5.3. Recognition of CRM Techniques in Reduction of Original Exposure
A bank must reduce the value of the exposure to the original counterparty by the amount of the eligible CRM technique recognised for risk-based capital requirements purposes. This recognised amount is:
a. the value of the protected portion in the case of unfunded credit protection;
b. the value of the portion of claim collateralised by the market value of the recognised financial collateral when the bank uses the simple approach for risk-based capital requirements purposes;
c. the value of the collateral adjusted after applying the required haircuts, in the case of financial collateral when the bank applies the comprehensive approach. The haircuts used to reduce the collateral amount are the supervisory haircuts under the comprehensive approach.10 Internally modelled haircuts must not be used.
d. the value of the collateral as recognized in the calculation of the counterparty credit risk exposure value for any instruments with counterparty credit risk, such as over the counter (OTC) derivatives;
10 GN 2, Page 14, of Basel II Package of Bank Prudential Returns and Guidance Notes Concerning Standardized Approach, 2007 and Chapter 6.1, Page 157, Basel II - SAMA's Detailed Guidance Document, 2006.
5.4. Recognition of Exposures to CRM Providers
Whenever a bank is required to recognise a reduction of the exposure to the original counterparty due to an eligible CRM technique, it must also recognise an exposure to the CRM provider. The amount assigned to the CRM provider is the amount by which the exposure to the original counterparty is reduced (except in the cases where credit protection takes the form of a CDS and either the CDS provider or the referenced entity is not a financial entity, the amount to be assigned to the credit protection provider is not the amount by which the exposure to the original counterparty is reduced but, instead, the counterparty credit risk exposure value calculated according to the SA-CCR)11
For the purposes of this section, financial entities comprise:
a. Regulated financial institutions, defined as a parent and its subsidiaries where any substantial legal entity in the consolidated group is supervised by a regulator that imposes prudential requirements consistent with international norms. These include, but are not limited to. prudentially regulated insurance companies, finance companies, broker/dealers, banks; and
b. Unregulated financial institutions, defined as legal entities whose main business may include similar activities as financial institutions but not regulated by supervisors.
11 See SAMA Circular No 351000095021, 21 May 2014, Basel Committee on Banking Supervision Document of March 2014 regarding the Standardized Approach for Measuring Counterparty Credit Risk Exposures
5.5. Treatment of Specific Measurement Issues
While determining the exposure values for the purposes of these Rules, the following specific issues will be dealt with as per the guidance provided in Appendix VI-X.12
i. Definition of exposure values:
a. Banking book on-balance sheet non-derivative assets;
b. Banking book and trading book OTC derivatives (and any other instrument with counterparty credit risk);
c. Securities financing transactions;
d. Banking book ‘‘traditional" off balance sheet commitments;
ii. Trading Book Positions:
a. Calculation of exposure value for trading book positions;
b. Offsetting long and short positions in the trading book;
iii. Covered bonds;
iv. Collective investment undertakings, securitizations vehicles and other structures;
v. Exposures to central counterparties.
12 See BCBS Document titled "Supervisory Framework for measuring and controlling large exposures" issued in April 2014 and FAQs issued in Sept 2016
5.6. Exposures Exempted from Exposure Limits
The following exposures shall be exempt from the large exposure limits specified under these Rules:
i. Sovereign exposures and entities connected with the Saudi Government: Banks’ exposures to the Saudi Government, SAMA. Entities Connected with the Saudi Government, GCC and their central banks will be exempt from exposure limits as under:
a. Any exposure directly taken to Saudi Government, SAMA and any of the Entities Connected with the Saudi Government;
b. Any portion of an exposure guaranteed, or secured by the financial instruments issued by Saudi government or SAMA to the extent that the eligibility criteria for recognition of the credit risk mitigation are met;
c. Any exposure to the GCC central governments and their central banks;
d. Any entity falling within the scope of the above sovereign exemption will not be taken into account when determining whether two (or more) entities that are in scope must be connected to form a Group of Connected Counterparties (i.e. if two entities that are in scope of the framework, which are otherwise not connected, are controlled by or economically dependent through an exempted entity they need not be connected);
e. Any exposure to an exempted entity which is hedged by a credit derivative, will be recognized as an exposure to the counterparty providing the credit protection notwithstanding the fact that the original exposure is exempted. In addition, if a bank has an exposure to an exempted entity which is hedged by a credit derivative, the bank will have to recognize an exposure to the counterparty providing the credit protection as prescribed in Section 5.4 of these Rules, notwithstanding the fact that the original exposure is exempted. Hence the credit protection provider would still be subject to the large exposure guidelines;
f. All exposures that are subject to the sovereign exemption under this Section must be reported under the regulatory' reporting requirements if these exposures meet the minimum reporting threshold.
ii. Interbank exposures. All intra-day interbank exposures will not be subject to the large exposures limits, neither for reporting purposes nor for application of the large exposure limits. However, all non-intraday interbank exposures will be subject to the large exposure limits.
In addition, under stressed and exceptional circumstances, SAMA (under its discretion) may accept a breach of an interbank limit ex post, in order to help ensure stability in the interbank market;
iii. Intra-group exposures: All exposures to intra-group entities of the concerned bank (within K.SA) will not be subject to the large exposures limits provided that such entities are included in the scope of accounting consolidation of the banking group. However, the non-banking subsidiaries in the financial sector will be subject to the exposure limit of 25% of the banks eligible capital.
All other exposures of a bank, not specifically listed above as exempted, must be fully subject to the large exposure limits.