Calculation of derivative liability amounts

Derivative liabilities are calculated first based on the replacement cost for derivative contracts (obtained by marking to market) where the contract has a negative value. When an eligible bilateral netting contract is in place that meets the conditions as specified in Paragraph 20 of Circular No. 351000133367 dated 25^th August 2014 . ⁶ the replacement cost for the set of derivative exposures covered by the contract will be the net replacement cost.

In calculating NSFR derivative liabilities, collateral posted in the form of variation margin in connection with derivative contracts, regardless of the asset type, must be deducted from the negative replacement cost amount.⁷,⁸

 
⁶ See circular No.351000133367, August 2014, sama.gov.sa

 ⁷ NSFR derivative liabilities = (derivative liabilities) - (total collateral posted as variation margin on derivative liabilities).
⁸ To the extent that the bank's accounting framework reflects on balance sheet, in connection with a derivative contract, an asset associated with collateral posted as variation margin that is deducted from the replacement cost amount for purposes of the NSFR, that asset should not be included in the calculation of a bank's required stable Funding (RSF) to avoid any double-counting.

The amount of required stable funding is measured based on the broad characteristics of the liquidity risk profile of an institution's assets and OBS exposures. The amount of required stable funding is calculated by first assigning the carrying value of an institution's assets to the categories listed. The amount assigned to each category is then multiplied by its associated required stable funding (RSF) factor, and the total RSF is the sum of the weighted amounts added to the amount of OBS activity (or potential liquidity exposure) multiplied by its associated RSF factor. Definitions mirror those outlined in the LCR, unless otherwise specified.⁹

The RSF factors assigned to various types of assets are intended to approximate the amount of a particular asset that would have to be funded, either because it will be rolled over, or because it could not be monetized through sale or used as collateral in a secured borrowing transaction over the course of one year without significant expense. Under the standard, such amounts are expected to be supported by stable funding.

Assets should be allocated to the appropriate RSF factor based on their residual maturity or liquidity value. When determining the maturity of an instrument, investors should be assumed to exercise any option to extend maturity. SAMA and banks will assume such behaviour for the purpose of the NSFR and include these assets in the corresponding RSF category. For assets with options exercisable at the bank's discretion, SAMA will take into account reputational factors that may limit a bank's ability not to exercise the option.¹⁰ For amortizing loans, the portion that comes due within the one-year horizon can be treated in the less-than-one-year residual maturity category.

For purposes of determining its required stable funding, an institution should (i) include financial instruments, foreign currencies and commodities for which a purchase order has been executed, and (ii) exclude financial instruments, foreign currencies and commodities for which a sales order has been executed, even if such transactions have not been reflected in the balance sheet under a settlement-date accounting model, provided that (i) such transactions are not reflected as derivatives or secured financing transactions in the institution's balance sheet, and (ii) the effects of such transactions will be reflected in the institution's balance sheet when settled.

Encumbered assets

Assets on the balance sheet that are encumbered¹¹ for one year or more receive a 100% RSF factor. Assets encumbered for a period of between six months and less than one year that would, if unencumbered, receive an RSF factor lower than or equal to 50% receive a 50% RSF factor. Assets encumbered for between six months and less than one year that would, if unencumbered, receive an RSF factor higher than 50% retain that higher RSF factor. Where assets have less than six months remaining in the encumbrance period, those assets may receive the same RSF factor as an equivalent asset that is unencumbered. In addition, for the purposes of calculating the NSFR, assets that are encumbered for exceptional¹² central bank liquidity operations may receive a reduced RSF factor. Please refer to the relevant FAQ¹³ issued by SAMA on RSF factor for assets encumbered under exceptional central bank liquidity operations.

Secured financing transactions

For secured funding arrangements, use of balance sheet and accounting treatments should generally result in banks excluding, from their assets, securities which they have borrowed in securities financing transactions (such as reverse repos and collateral swaps) where they do not have beneficial ownership. In contrast, banks should include securities they have lent in securities financing transactions where they retain beneficial ownership. Banks should also not include any securities they have received through collateral swaps if those securities do not appear on their balance sheets. Where banks have encumbered securities in repos or other securities financing transactions, but have retained beneficial ownership and those assets remain on the bank's balance sheet, the bank should allocate such securities to the appropriate RSF category.

Securities financing transactions with a single counterparty may be measured net when calculating the NSFR, provided that the netting conditions set out in Paragraph 32 of the Circular No. 351000133367, titled "Basel Committee on Banking Supervision Document regarding Basel Ill Leverage Ratio Framework and Disclosure Requirements based on BCBS document regarding Basel Ill Leverage Ratio framework issued on 12 January 2014" , dated 25^th August 2014 document are met.

Calculation of derivative asset amounts

Derivative assets are calculated first based on the replacement cost for derivative contracts (obtained by marking to market) where the contract has a positive value. When an eligible bilateral netting contract is in place that meets the conditions as specified in paragraphs 20 of the Circular No. 351000133367*, titled "Basel Committee on Banking Supervision Document regarding Basel Ill Leverage Ratio Framework and Disclosure Requirements based on BCBS document regarding Basel Ill Leverage Ratio framework issued on 12 January 2014", dated 25th August 2014, the replacement cost for the set of derivative exposures covered by the contract will be the net replacement cost.

In calculating NSFR derivative assets, collateral received in connection with derivative contracts may not offset the positive replacement cost amount, regardless of whether or not netting is permitted under the bank's operative accounting or risk-based framework, unless it is received in the form of cash variation margin and meets the conditions as specified in paragraph 24 of the Circular No. 351000133367*, titled "Basel Committee on Banking Supervision Document regarding Basel Ill Leverage Ratio Framework and Disclosure Requirements based on BCBS document regarding Basel Ill Leverage Ratio framework issued on 12 January 2014", dated 25th August 2014.¹⁴ Any remaining balance sheet liability associated with (a) variation margin received that does not meet the criteria above or (b) initial margin received may not offset derivative assets and should be assigned a 0% ASF factor.

⁹ For the purposes of calculating the NSFR. HQLA are defined as all HQLA without regard to LCR operational requirements and LCR caps on Level 2 and Level 2B assets that may otherwise limit the ability of some HQLA to be included as eligible HQLA in calculation of the LCR. HQLA are defined in LCR paragraphs 24-68. Operational requirements are specified in LCR paragraphs 28-43. - Refer SAMA's Revised Amended Liquidity Coverage Ratio Regulations and Guidance Documents.- Attachment # 1, SAMA's General Guidance concerning Amended LCR.
¹⁰ This could reflect a case where a bank may imply that it would be subject to funding risk if it did not exercise an option on its own assets.
¹¹ Encumbered assets include but are not limited to assets backing securities or covered bonds and assets pledged in securities financing transactions or collateral swaps. "Unencumbered" is defined in LCR paragraph 31. Refer SAMA's Revised Amended Liquidity Coverage Ratio Regulations and Guidance Documents.- Attachment# 1, SAMA's General Guidance concerning Amended LCR.
¹² In general, exceptional central bank liquidity operations are considered to be non-standard, temporary operations conducted by the central bank in order to achieve its mandate in a period of market-wide financial stress and/or exceptional macroeconomic challenges.
¹³ Please refer to the FAQ issued by SAMA.
¹⁴ NSFR derivative assets= (derivative assets) - (cash collateral received as variation margin on derivative assets).
^* Reference to that circular is no longer relevant. This Circular has been superseded by Leverage Ratio Framework under the Basel III Reforms, (44047144), dated 04/06/1444 H.