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  • Guidelines on the Regulatory Treatment of Banks' Exposures to Central Counterparties

    No: 41038270 Date(g): 26/1/2020 | Date(h): 1/6/1441Status: In-Force

     

    Based on the powers granted to the Central Bank under Bank Control Law No. M/5 dated 22/02/1386 H Simultaneously with the announcement by the Saudi Stock Exchange Company (Tadawul) regarding the establishment of the Securities Clearing Center Company (Clearing Center), the aim is to develop clearing services and ensure the settlement of all categories of securities traded in the market in line with the best practices and international standards.

    Facilities for regulatory treatment instructions regarding banks' exposures to Central Counterparties (CCPs), aimed at regulating banks' exposures to central securities clearing houses.

    • 1. Introduction

      -  Central Counterparties (CCPs) have become increasingly critical components of the financial system in recent years, due in part to the introduction of mandatory clearing for standardised OTC derivatives in some jurisdictions. Consistent with the key responsibility of guaranteeing the fulfilment of transactions to their clearing participants, CCPs play an important role in mitigating contagion risk in the event of a participant default. A CCPs ability to effectively manage a default is essential to its resilience and can help reduce systemic risk.
      -  SAMA via these guidelines, is emphasizing on the treatment of banks' trade exposures to a CCP under capital, large exposures, leverage ratio rules along with Pillar 2 framework.
      -  Banks should note that the foreign regulators would do an assessment to include Saudi CCPs in the list of their Qualifying Counterparties (QCCPs), in terms of exposures of banks under their jurisdictions to this entity.

       

       

       

    • 2. General terms

      -Central Counterparty (CCP):
       

      (As defined in the BCBS guidelines on Capital Requirements for Banks Exposures to Central Counterparties and as published via SAMA circular No. 371000101116 dated 15/09/1437 AH)

      A clearinghouse that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the future performance of open contracts. A CCP becomes counterparty to trades with market participants through novation, an open offer system, or another legally binding arrangement.

      -Qualifying Central Counterparty (QCCP):
       

      (As defined in the BCBS guidelines on Capital Requirements for Banks Exposures to Central Counterparties and as published via SAMA circular no. 371000101116 dated 15/09/1437 AH)

      An entity that is licensed to operate as a CCP (including a license granted by way of confirming an exemption), and is permitted by the appropriate regulator/overseer (CMA) to operate as such with respect to the products offered. This is subject to the provision that the CCP is based and prudentially supervised in a jurisdiction where the relevant regulator/overseer has established. (Saudi Arabia) and publicly indicated that it applies to the CCP on an ongoing basis, domestic rules and regulations that are consistent with the CPMI-IOSCO Principles for Financial Market Infrastructures.

      -Direct Clearing Member:
       

      (As defined in Securities Central Counterparties Regulations Issued by the Board of the Capital Market Authority Pursuant to its Resolution No. 3-127-2019 Dated 21/03/1441AH)

      A Clearing Member who is authorised to clear Securities which it has traded in its capacity as a member of an Exchange, including Securities it has traded on its own account or on behalf of its Client (s). A Direct Clearing Member shall not be permitted to clear for Exchange members with no clearing memberships.

      - General Clearing Member:
       

      (As defined in Securities Central Counterparties Regulations Issued by the Board of the Capital Market Authority Pursuant to its Resolution No. 3-127-2019 Dated 21/03/1441AH)

      A Clearing Member who is authorised to clear Securities on behalf of its Client(s), including Exchange members that with no clearing memberships. A General Clearing Member, to the extent that it is a member of an Exchange, shall be permitted to clear Securities which it has traded in its capacity as a member of an Exchange, including Securities it has traded on its own account or on behalf of its Client(s).

       

    • 4. SAMA Requirements for Banks Who Wish to Apply for Clearing Membership

      Banks who wish to engage in CCP activities and apply for a General Clearing Membership, to clear activities on behalf of their customers, must obtain a Non-objection from SAMA.

       

    • 5. Regulatory Treatment of a Bank's and its clients' Exposures to CCPs

      -Capital Requirements:
      Firstly, Qualifying CCP (QCCP):
       
      -Where a bank acts as a clearing member of a CCP for its own purposes, a risk weight of 2% must be applied to the bank's trade exposure to the CCP in respect of derivatives transactions.
      -Where the bank, as a clearing member, offers clearing services to clients, the 2% risk weight also applies to the clearing member's trade exposure to the CCP that arises when the clearing member is obligated to reimburse the client for any losses suffered due to changes in the value of its transactions in the event that the CCP defaults.
      -Where a client is not protected from losses in the case that the clearing member and another client of the clearing member jointly default or become jointly insolvent but all other conditions relating to offsetting and default (as stated in circular no. 371000101116 dated 15/09/1437AH) are met, a risk weight of 4% will apply to the client's exposure to the clearing member, or to the higher-level client, respectively.
      -The banks' contribution to the CCP's default fund will be risk weighted according to the methods explained in Basel rules (SAMA circular no. 371000101116 dated 15/09/1437AH).
      Secondly, Non-Qualifying CCP:
       
      -Banks must apply the standardized approach for credit risk, according to the category of the counterparty, to their trade exposure to a non-QCCP.
      -For a default fund, a risk weight of 1250% will be applied. For the purposes of this paragraph, the default fund contributions of such banks will include both the funded and the unfunded contributions which are liable to be paid should the CCP so require.
      -Large Exposures:
       
      -Banks exposures to CCPs are subject to the regulatory requirements as defined in SAMA Large Exposures Rules (circular no.1651/67 dated 09/01/1441 AH).
      -Banks' exposures to QCCPs related to clearing activities are exempted from the large exposures framework. However, these exposures are subject to the regulatory reporting requirements as defined in the rules mentioned above.
      -In the case of non-QCCPs, banks must measure their exposures as a sum of both the clearing exposures and other exposures as described in rules mentioned above, and must meet the general large exposure limit of 25% of the eligible capital base.
      - Leverage Ratio:
       Where a bank acting as clearing member offers clearing services to clients, the clearing member's derivative trade exposures to the CCP that arise when the clearing member is obligated to reimburse the client for an)/ losses suffered due to changes in the value of its transactions in the event that the CCP defaults must be captured by applying the same treatment that applies to any other type of derivative transaction. Therefore, this will be included in the exposure measure in the leverage ratio calculation. (For further guidance, refer to SAMA circular No. 351000133367 dated 29/10/1435AH and circular No. 351000155075 dated 28/12/1435AH).
      -Basel Reporting:
       

      Banks must use SAMA Q17 - Template to report their risks and exposures to the CCP in the following cells:

      SheetCellDescription
      Q17.2$B$27Exposure amount for contributions to the default fund of a Domestic CCP
      Q17.2$B$28Domestic QCCP
      Q17.2$B$29Foreign QCCP
      Q17.2$B$68Risk Relating to CCP
      Q17.4$A$12Of which: Centrally cleared through a Domestic QCCP
      Q17.4$A$13Of which: Centrally cleared through a Foreign QCCP
      Q17.4$A$162%
      Q17.4$A$174%
      Q17.5$A$26Centrally cleared through a Domestic QCCP
      Q17.5$A$27Centrally cleared through a Foreign QCCP
      Q17.5.3$A$26Centrally cleared through a Domestic QCCP
      Q17.5.3$A$27Centrally cleared through a Foreign QCCP
      Q17.9$C$127Risk Relating to CCP
      -ICAAP and ILAAP:
       Banks must capture an)/ risks arising from their CCP activities in the ICAAP and ILAAP documents in line with SAMA ICAAP and ILAAP rules issued via circulars No. 58514.BCS.27835 dated. 15/11/2011 and 381000120488, dated 03/12/1438AH. Special attention should be paid in terms of concentration risks if any, arising from a CCP.

       

    • 6. Additional Requirements

      Banks are required to report "reportable transactions" cleared through the CCP to the SAMA authorised Trade Repository Operator (as defined and stated in SAMA circular No. 16278/67 dated 13/03/1441 AH).